balanced scorecard thesis

Estonian Business School

BBA programme

Overview of Construction and Implementation of Balanced Scorecard

Bachelor Theses

Written by:

Marko Rillo

Promotor:

Ruth Alas

Tallinn 2000

Kaitsmisele lubatud “……” ……………………… 2000. a.

Õppetooli juhataja või juhendaja ………………………………

Olen koostanud bakalaureusetöö iseseisvalt. Kõik töö koostamisel kasutatud teiste

autorite tööd, põhimõttelised seisukohad, kirjandusallikatest ja mujalt pärinevad andmed

on viidatud.

Marko Rillo

1

Executive summary.........................................................................................................3

1. Theory behind the Balanced Scorecard................................................................4

1.1. Background of the Concept of Balanced Scorecard..............................................4

1.2. Balanced Scorecard as Complementary Tool for Management Accounting........8

1.3. Balanced Scorecard as a Measurement Tool.......................................................12

1.4. Balanced Scorecard as a Strategic Management System....................................13

2. Constructing a Balanced Scorecard....................................................................17

2.1. Establishing Strategy by Building up a Balanced Scorecard..............................20

2.1.1. Clarifying and Translating the Vision and Strategy....................................202.1.2. Communicating and Linking Strategic Objectives and Measures..............212.1.3. Planning, Setting Targets and Aligning Strategic Initiatives......................232.1.4. Enhancing Strategic Feedback and Learning.............................................24

2.2. Defining Critical Success Factors and Measures................................................28

2.2.1. Financial Perspective..................................................................................282.2.2. Customer Perspective..................................................................................292.2.3. Internal Business Process Perspective........................................................332.2.4. Learning and Growth Perspective...............................................................342.2.5. Conclusions and Recommendations – How Many Measures to Choose?...35

2.3. Testing the Balanced Scorecard..........................................................................37

2.3.1. Analysing Outcomes and Performance Drivers..........................................372.3.2. Analysing Cause and Effect.........................................................................38

2.4. Establishing Action Plan.....................................................................................39

2.4.1. Setting up Catalytic Mechanisms................................................................39

3. Implementing a Balanced Scorecard as a Management System.......................41

3.1. Case Studies on Implementing a Balanced Scorecard........................................42

3.1.1. Practical Aspects of Setting up Balanced Scorecard in a Service Company42

3.1.2. Using the Balanced Scorecard at Metro Bank............................................453.1.3. Using the Results of a Balanced Scorecard at Sears Company..................47

3.2. Conclusions and Recommendations on Implementing a Balanced Scorecard....50

4. Summary................................................................................................................52

Bibliography...................................................................................................................54

Resümee – Tasakaalustatud hindemaatriksi koostamine ja kasutamine.................56

2

Executive summary

The overall objective of the thesis is to analyse the use of Balanced Scorecard 1 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 Estonia. Therefore,

the author pays very 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 third chapter, attention is given to day-to-day implementation of Balanced

Scorecard using the examples of three case studies. Finally, some conclusions and

recommendations are drawn based on practical use of the Balanced Scorecard.

1 The concept of the Balanced Scorecard was introduced in series of articles by Messrs. Robert S. Kaplan

and David P. Norton. Robert S. Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the

Harvard Business School in Boston, Massachusetts. David P. Norton is the founder and president of

Renaissance Solutions, a consulting firm in Lincoln, Massachusetts.

3

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 Management2. In 1920-ies it went

around assembly line and motion studies3 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 employees4, 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.5

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.

2 Published in 1911.

3 The works that describe the best those applications are written by father of contemporary scientific

management Frederick W. Taylor, psychologists Frank and Lillian Gilbrecht and practising manager

Henry Ford.

4 Hereby referring to the works by Elton Mayo.

5 Works by George B Dantzig and others.

4

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.6 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,

the financial control systems were developed in major companies to facilitate and

monitor efficient allocations of financial and physical capital.7 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.8

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

6 Chandler, A. D. Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge,

Massachusetts: Harvard University Press, 1990).

7 Chandler, A. D. Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge,

Massachusetts: Harvard University Press, 1977) and Johnson, T. H. and Kaplan R. S, Relevance Lost:

The Rise and Fall of Management Accounting (Boston: Harvard Business School Press, 1987).

8 Itami, H. Mobilizing Invisible Assets (Cambridge, Massachusetts: Harvard University Press, 1990),

referred through Kaplan, Robert S. and Norton, David P. Translating Strategy into Action – The Balanced

Scorecard, Harvard Business School Press, Boston, 1996, p. 3.

5

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,

Activity-based cost management,

Employee empowerment,

Living company,

and so on9. 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 problems10:

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;

9 Theories by Tai-ichi Ohno, W. E. Deming, Arie de Geus and many more authors.

10 As adapted from Kaplan, Robert S. and Norton, David P. Translating Strategy into Action – The

Balanced Scorecard, Harvard Business School Press, Boston, 1996, pp 6-40 and p. 193.

6

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.11

Introduced in the beginning of 1990-ies by Robert S. Kaplan and David P. Norton, the

Balanced Scorecard uses a balanced measurement system that comprises of “the old”

financial side and three “new” perspectives of:

business processes (operational efficiency);

growth and learning (knowledge management);

customers (satisfaction and image of company to outside partners).

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.

11 Which was introduced in series of articles by Messrs. Robert S. Kaplan and David P. Norton. Robert S.

Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the Harvard Business School in

Boston, Massachusetts. David P. Norton is the founder and president of Renaissance Solutions, a

consulting firm in Lincoln, Massachusetts.

7

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.12 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

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.13

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.14 Current system is less supportive to long-term investments,

12 Juran, Joseph M., Made in U.S.A.: A Renaissance in Quality, Harvard Business Review, Jul-Aug 1993,

p. 45.

13 Ibid.

14 Porter, Michael E. Capital Disadvantage: America’s Failing Capital Investment System, Harvard

Business Review , Sept-Oct 1992, p. 73.

8

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.15

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. Hronec16 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

framework for the Balanced Scorecard (see Figure 1 - 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.

15 Ibid.

16 In his book “Vital Signs”.

9

For more information about those developments, it is recommended to visit a valuable

resource on this issue – the Internet site “The Scorecard Authority – Websites for

Management Insights” at address http://www.bettermanagement.com/bscauthority

10

Figure 1 - The Main Framework of Balanced Scorecard17

17 From: Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 76.

To succeed financially, how should we appear to our shareholders?

FinancialObjectivesMeasuresTargetsInitiatives

To achieve our vision, how should we appear to our customers?

CustomerObjectivesMeasuresTargetsInitiatives

To satisfy our shareholders and customers, what business processes must we excel

at?Internal Business ProcessObjectivesMeasuresTargetsInitiatives

To achieve our vision, how will we sustain our ability to change and improve?

Learning and GrowthObjectivesMeasuresTargetsInitiatives

Vision and Strategy

1.3.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.18

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.19

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.

1.4.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.

18 Kaplan, Robert S. and Norton, David P. Translating Strategy into Action – The Balanced Scorecard,

Harvard Business School Press, Boston, 1996, p. 1.

19 Kaplan, Robert S. and Norton, David P., Translating Strategy into Action – The Balanced Scorecard

(Boston: Harvard Business School Press, 1996), p. 52.

13

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

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.20

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 2 - 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.21



14

During the next chapter, the author is going to go through step-by-step in construction

of a manageable Balanced Scorecard.



15

Figure 2 - Balanced Scorecard as a Strategic Framework for Action22

22 From: Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 77.

Clarifying and Translating the Vision and StrategyClarifying the visionGaining concensus

Communication and LinkingCommunicating and educatingSetting goalsLinking rewards to performance measures

Planning and Target SettingSetting targetsAligning strategic initiativesAllocating resourcesEstablishing milestones

Strategic feedback and learningArticulating the shared visionSupplying strategic feedbackFacilitating strategy review and learning

Balanced Scorecard

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 Figure 3 - Creating

a Balanced Scorecard.23

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.

23 Slightly modified version of the model taken from QPR internet portal at address

http://www.qprservices.com/

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.

18

Figure 3 - Creating a Balanced Scorecard24

24 Slightly modified version of the chart taken from QPR internet portal at address

http://www.qprservices.com/

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.

The first task in building up the Balanced Scorecard is clarifying and translating

company’s vision and strategic goals.25

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.26 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.

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).27 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.

25 Kaplan, Robert S. and Norton, David P., Putting the Balanced Scorecard to Work, Harvard Business

Review, Sept-Oct 1993, p. 138.

26 Alas, Ruth, Strateegiline juhtimine (Tallinn, Külim, 1997), p. 7.

27 Campbell, Andrew and Alexander, Marcus, What’s Wrong with Strategy Harvard Business Review,

Nov-Dec 1997, p. 42-46.

20

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.28

2.1.2. Communicating and Linking Strategic Objectives and Measures

The next 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


(Boston: Harvard Business School Press, 1996) p. 11-12.

21

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

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.29

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.30



30 Drucker, Peter F., Management: Tasks, Responsibilities and Practices (New York: Harper & Row,

1985), pp. 640-641.

22

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.31 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.

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. 32

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.

31 Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms Harvard Business

Review, Jul-Aug 1999, p. 71.

32 On the use of those methods and technologies, refer to Dettmer, William H. Breaking the Constraints to

World-Class Performance (Milwaukee, Wisconsin: ASQ Quality Press, 1998), pp. 14-102.

23

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.

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.33

2.1.4. Enhancing Strategic Feedback and Learning

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.34

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,

33 Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms Harvard Business

Review, Jul-Aug 1999, pp. 71-. See also Chapter “Setting up Catalytic Mechanisms” on page 39 of the

thesis for more information.



24

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 component. 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 2 - Balanced

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

25

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.35 Please look at Figure 4 – Possible Steps

to Go Around the Balanced Scorecard for more detailed description.36

35 W. Edwards Deming.

36 Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management

System, Harvard Business Review, Jan-Feb 1996, p. 79.

26

Figure 4 – Possible Steps to Go Around the Balanced Scorecard37

37 Kaplan, Robert S. and Norton, David P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, Jan-Feb 1996, p. 79.

Clarifying and Translating the Vision and StrategyClarifying the visionGaining concensus

Communication and LinkingCommunicating and educatingSetting goalsLinking rewards to performance measures

Planning and Target SettingSetting targetsAligning strategic initiativesAllocating resourcesEstablishing milestones

Strategic feedback and learningArticulating the shared visionSupplying strategic feedbackFacilitating strategy review and learning

Balanced Scorecard

1

2

3

4

5

67

89

10

2.2.Defining Critical Success Factors and Measures

2.2.1. Financial Perspective

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

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” organisations38 - 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

38 Kaplan, Robert S. and Norton, David P., Linking the Balanced Scorecard to Strategy, California

Management Review, Fall 1996, pp. 54-55.

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

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.39

2.2.2. Customer Perspective

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

39 Ibid, p. 56

29

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

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

30

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

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

31

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

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

32

organises the value propositions in all of the industries where we have constructed

scorecards. These attributes are organised into three categories.40

Product/Service Attributes

Customer Relationship

Image and Reputation

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.41

2.2.3. Internal Business Process Perspective

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.

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


Management Review, Fall 1996, p. 62.

41 Ibid.

33

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.

2.2.4. Learning and Growth Perspective

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

34

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.

2.2.5. 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.42

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



35

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."43

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.

43 Kaplan, Robert S. and Norton, David P., Implementing the Balanced Scorecard at FMC Corporation:

An Interview with Larry Brady, Harvard Business Review, Sept-Oct 1993, pp. 143-145.

36

2.3.Testing the Balanced Scorecard

2.3.1. 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.

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.

2.3.2. 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

37

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.

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.44



38

2.4.Establishing Action Plan

2.4.1. 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.45

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

Malcolm Baldrige National Quality Award in 1992. In addition, its financial

45 The following examples about catalytic mechanisms are taken from Collins, Jim, Turning Goals into

Results: The Power of Catalytic Mechanisms Harvard Business Review, Jul-Aug 1999, pp. 71-82.

39

performance has significantly improved from razor-thin margins to ratios above 10 per

cent.46

It is obvious that Estonian business culture is not yet up to standards to try to implement

Short Pay principle in some of our companies, as it might lead such a company to a

bankruptcy fairly quickly. 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.

46 Ibid.

40

3. Implementing a Balanced Scorecard as a Management System

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. 47

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."48


(Boston: Harvard Business School Press, 1996), pp. 272-273.



41

3.1.Case Studies on Implementing a Balanced Scorecard

3.1.1. 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.49

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

49 The following is based on an interview referred through internet address in the Business Finance

Magazine http://www.businessfinancemag.com/.

42

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.

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

43

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."

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.

44

3.1.2. Using the Balanced Scorecard at Metro Bank50

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.

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

50 As adapted from Kaplan, Robert S. and Norton, David P., Translating Strategy into Action – The

Balanced Scorecard (Boston: Harvard Business School Press, 1996), pp. 110-112, 294-310.

45

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

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

46

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.

3.1.3. Using the Results of a Balanced Scorecard at Sears Company51

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

51 The following is based on an interview referred through Internet address in the Business Finance

Magazine http://www.businessfinancemag.com/.

47

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

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.

48

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.

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

49

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."

3.2.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.52

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.

The personal experience of the author 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.

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.

52 Kaplan, Robert S. and Norton, David P., Knowing the Score, Financial Executive, Nov-Dec 1996, p.

33.

50

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.

51

4. 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.

52

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.

53

Bibliography

1. Alas, Ruth, Strateegiline juhtimine (Tallinn, Külim, 1997).

2. The Scorecard Authority – Websites for Management Insights at address

http://www.bettermanagement.com/bscauthority (last accessed by the author in 14th

of April 2000).

3. Campbell, Andrew and Marcus Alexander, What’s Wrong with Strategy? Harvard

Business Review, Nov-Dec 1997.

4. Chandler, A. D. Jr., Scale and Scope: The Dynamics of Industrial Capitalism

(Cambridge, Massachusetts: Harvard University Press, 1990).

5. Chandler, A. D. Jr., The Visible Hand: The Managerial Revolution in American

Business (Cambridge, Massachusetts: Harvard University Press, 1977).

6. Collins, Jim, Turning Goals into Results: The Power of Catalytic Mechanisms

Harvard Business Review, Jul-Aug 1999.

7. Dettmer, William H. Breaking the Constraints to World-Class Performance

(Milwaukee, Wisconsin: ASQ Quality Press, 1998).

8. Downing, Laura, vice president of the Massachusetts-based consulting firm

Balanced Score Card Collaborative Inc. Interview over internet address in the

Business Finance Magazine http://www.businessfinancemag.com/

9. Drucker, Peter F., Management Challenges for the 21st Century (New York: Harper

Business, 1999).

10. Drucker, Peter F., Management: Tasks, Responsibilities and Practices (New York:

Harper & Row, 1985).

11. Elenurm, Tiit, manager of EM-International. Interview conducted in 31st of March

2000.

12. Johnson, T. H. and Robert S. Kaplan, Relevance Lost: The Rise and Fall of

Management Accounting (Boston: Harvard Business School Press, 1987).

13. Juran, Joseph M., Made in U.S.A.: A Renaissance in Quality, Harvard Business

Review, Jul-Aug 1993.

54

14. Kaplan, Robert S., Devising a Balanced Scorecard Matched to Business Strategy,

Planning Review, Sept-Oct 1994.

15. Kaplan, Robert S. and David P. Norton, The Balanced Scorecard – Measures that

Drive Performance, Harvard Business Review, Jan-Feb 1992.

16. Kaplan, Robert S. and David P. Norton, Implementing the Balanced Scorecard at

FMC Corporation: An Interview with Larry Brady, Harvard Business Review, Sept-

Oct 1993.

17. Kaplan, Robert S. and David P. Norton, Knowing the Score, Financial Executive,

Nov-Dec 1996.

18. Kaplan, Robert S. and David P. Norton, Linking the Balanced Scorecard to

Strategy, California Management Review, Fall 1996.

19. Kaplan, Robert S. and David P. Norton, Putting the Balanced Scorecard to Work,

Harvard Business Review, Sept-Oct 1993.

20. Kaplan, Robert S. and David P. Norton, Strategic Learning and the Balanced

Scorecard. Strategy and Leadership, Sept-Oct 1996.

21. Kaplan, Robert S. and David P. Norton, Translating Strategy into Action – The

Balanced Scorecard (Boston: Harvard Business School Press, 1996).

22. Kaplan, Robert S. and David P. Norton, Using the Balanced Scorecard as a

Strategic Management System, Harvard Business Review, Jan-Feb 1996.

23. Kurtzman, Joel, Is Your Company off Course? Now You can Find Out Why, Fortune,

17th of February, 1997.

24. Quinn, Rick , former vice president of quality, Sears, Roebuck & Co. Interview over

internet address in the Business Finance Magazine

http://www.businessfinancemag.com/

55

Resümee – Tasakaalustatud hindemaatriksi koostamine ja kasutamine

Bakalaureusetöö eesmärk oli analüüsida tasakaalustatud hindemaatriksi kasutamist

strateegilise juhtimise ja üldjuhtimise valdkonnas. Peamine põhjus, miks tasakaalustatud

hindemaatriksi lähenemine Harvardi Ülikooli professorite ja konsultantide Robert S.

Kaplani ja David P. Nortoni poolt loodi, seisnes selles, et kuni 1980-date aastateni

kasutusel olnud finantsnäitajatel baseeruvad mõõtmissüsteemid ei andnud adekvaatset

pilti organisatsiooni edukuse tegelikust seisust.

Tasakaalustatud hindemaatriks ongi definitsiooni kohaselt strateegiale orienteeritud

tegevuse mõõtmissüsteem, mis analüüsib lisaks mineviku tegevuse edukusele

viitavatele traditsioonilistele rahalistele näitajatele (nt kasum ja varade tootlus) ka

organisatsiooni käesoleva hetke ning tuleviku näitajaid. Viimased seonduvad enamasti

klientide, allhankijate, töötajate, äriprotsesside, tehnoloogiate ja uuendustega.

Oma olemuselt ei ole tasakaalustatud hindemaatriksi tinglikus nelikjaotuses, mis

koosneb a) rahalisest-, b) sisemiste äriprotsesside-, c) õppimise ja arengu- ning d)

klientideperspektiivist, iseenesest midagi uut. Sisemiste äriprotsessidega tegelevad

varasemate teooriate raames põhjalikumalt kõikvõimalikud kvaliteedisüsteemid,

õppimise ja arengu osasid on analüüsitud teadmusjuhtimise erinevates suundades ning

kliente on samuti uuritud erinevate küsitluste ja statistiliste analüüside käigus.

Tasakaalustatud hindemaatriksi ülesandeks ongi tuua kõik need erinevad

organisatsiooni tegevust analüüsivad näitajad kokku ühtsesse süsteemi ning mõõta neid

tasakaalustatult, organisatsiooni strateegilistest eesmärkidest lähtuvalt.

Töös analüüsitakse tasakaalustatud hindemaatriksi rakendamisega seonduvaid detaile

ning antakse nõu rakendamisel tekkivate küsimuste lahendamiseks praktiliste näidete

varal. Autor soovitab tänapäevases informatsiooni- ning teabeühiskonna keskses

ärikeskkonnas konkurentsieelise säilitamiseks firmadel hakata kasutama tasakaalustatud

hindekaardi metodoloogiaid, mis annavad varasemast adekvaatsema pildi

organisatsiooni tegevuse eesmärgipärasusest. Maailma juhtivates majandusajakirjades

on viimaste aastate jooksul mainitud, et see on juba kasutusele võetud paljudes

globaalsetes organisatsioonides: Chase Manhattan, Hewlett-Packard, IBM, FMC

Corporation, Mobil, Shell, Sears, Texaco on ainult lühike osa nimekirjast, mis täieneb

56

iga päevaga.53 Kahtlemata peaksid selle temaatikaga tegelema aktiivselt ka Eesti firmad,

sest saabuv liitumine Euroopa Liiduga raskendab praegust konkurentsi veelgi.

Autori enese kogemus tööst tasakaalustatud hindemaatriksi rakendamisel võiks lühidalt

kokku võtta järgmiselt. Kahtlemata võib seda lugeda kasulikuks vahendiks, mille abil

täpsustada organisatsiooni missiooni ja strateegilisi eesmärke. Lisaks aitab selle

rakendamisel läbi viidav mitmetasandiline organisatsiooni protsesside analüüs

identifitseerida võimalikke puudujääke olemasolevates eesmärkides.

Teiseks on tasakaalustatud hindemaatriks tõestanud ka enese kasulikkust strateegiate

kommunikatsioonivahendina, kuna erinevalt tsentraliseeritud strateegilise planeerimise

süsteemidest on peaaegu iga organisatsiooni liige on kohustatud sõnastama mingi osa

organisatsiooni tegevuse strateegilistest ja taktikalistest eesmärkidest ning nende

seostest organisatsiooni missiooniga. Kahtlemata aitab see kanda ellu ka teist eesmärki

– nimelt garanteerida seda, et kõik organisatsiooni liikmed oleksid organisatsiooni

strateegiast paremini teadlikud ning sellele orienteeritud. Lõppkokkuvõttes aitab see

vähendada nende tegevuste osakaalu, mis ei aita otseselt kaasa organisatsiooni

eesmärkide saavutamisele ja on seega ebaefektiivsed.

Kolmandaks lihtsustab tasakaalustatud hindemaatriks tunduvalt ülevaadet

operatiivjuhtimise erinevatest osadest.

Rakenduse negatiivsete aspektidena võiks välja tuua loomulikult strateegilise

planeerimise teatud protsesside tunduva aeglustumise, sest niivõrd mitmetel tasanditel

toimuvad diskussioonid strateegiate sõnastamise osas kahtlemata võtavad rohkem aega.

Teine ajaga seonduv negatiivne mõju on mõnevõrra suurenev bürokraatia, mis paraku

kaasneb kõikide süsteemide puhul, mis on kuidagiviisi ühendatud suureneva

aruandlusega.

Samas on võimalik neid negatiivseid mõjusid vähendada juhul, kui maatriks ehitatakse

üles infotehnoloogilise lahendusena ning selle abil on võimalik peaaegu reaalajas

vaadelda muutusi organisatsiooni tegevuses. Käesoleva väitekirja kirjutamise ajal

õnnestus autoril leida vähemalt nelja erineva tarkvarafirma poolt pakutavaid kohtvõrgul

53 Kaplan, Robert S. and Norton, David P., Knowing the Score, Financial Executive, Nov-Dec 1996, p.

33.

57

või internetil rajanevaid tarkvaralahendusi, mille abil on tasakaalustatud hindemaatriksi

haldamist organisatsioonis võimalik tunduvalt lihtsustada.

Teine otsene soovitus seoses tasakaalustatud hindemaatriksi kasutuselevõtuga on see, et

seda on soovitatav hakata rakendama koos ISO- või EFQM-il põhineva

kvaliteedisüsteemiga, kliendihaldusprojektiga ning living company kontseptsiooniga.

Põhjus on selles, et olemuselt kasutab tasakaalustatud hindemaatriks oma erinevates

perspektiivides üpriski palju ülalnimetatud mõistete meetodeid, mistõttu nende

rakenduste paralleelne kasutuselevõtt vähendab suuresti ajakulu ning lõppkokkuvõttes

annab ka paremaid tulemusi.

Autor leidis oma bakalaureusetöös, et tasakaalustatud hindemaatriksit võib lugeda üheks

parimaks vahenditest, millega lahendada alljärgnevaid küsimusi:

siduda omavahel strateegilisi, pikaajalisi eesmärke lühiajaliste operatiivjuhtimise

sammudega;

juhtida erinevaid kriitilisi edutegureid strateegilise juhtimise metodoloogia valguses;

hinnata töö tulemuste efektiivsust;

anda igapäevaste juhtimisotsuste kaudu hinnangut strateegilistele eesmärkidele.

58

balanced scorecard thesis

Documents