Chapter 24 - Balanced Scorecard - In-Depth PDF

# Chapter 24: Balanced Scorecard - In-Depth ## Chapter 24: Balanced Scorecard - In-Depth This chapter applies the performance measurement concepts of strategic mapping and the balanced scorecard. It is a continuation of the concepts introduced in the Balanced Scorecard - Overview chapter. ### Less...

# Chapter 24: Balanced Scorecard - In-Depth ## Chapter 24: Balanced Scorecard - In-Depth This chapter applies the performance measurement concepts of strategic mapping and the balanced scorecard. It is a continuation of the concepts introduced in the Balanced Scorecard - Overview chapter. ### Lessons - Lesson 1: Building a Strategy Map and Balanced Scorecard - Lesson 2: Balanced Scorecard - In-Depth - Summary Problem ## Management Accounting Snapshot ### Balanced Scorecard - In-Depth #### Balanced Scorecard Perspective | Step | Description | |---|---| | Step 1 | Specify an overriding objective | | Step 2 | Determine the dominant value proposition | | Step 3 | Choose the key financial strategies | | Step 4 | Choose the key customer strategies | | Step 5 | Execute through the internal perspective strategies | | Step 6 | Plan the learning and growth strategies | #### Steps in creating the balanced scorecard | Step | Description | |---|---| | Step 1 | Choose the perspectives framework | | Step 2 | Select goals from each perspective | | Step 3 | Establish the appropriate measure (s) | | Step 4 | Decide on the specific quantitative targets | | Step 5 | Compile the results | ## Lesson 1: Building a Strategy Map and Balanced Scorecard ### Competencies: - 3.1.1 Evaluates management information requirements - 3.1.2 Documents and assesses business processes, systems and data requirements and recommends improvements to meet information needs - 3.6.1 Evaluates performance using accepted frameworks - 3.6.3 Evaluates root causes of performance issues ### Learning Outcomes: - Describe the steps to preparing a strategy map. - Explain the five-step process for developing the BSC. - Describe how employees impact the BSC. ## 24.1 Building a Strategy Map Recall from the Balanced Scorecard - Overview chapter that a strategy map is a visual aid that brings the strategy to life in a generalized but highly integrated manner. There is no single correct approach to creating a strategy map. One step-by-step approach that can be used (or adapted) is as follows: 1. Specify an overriding objective - A very brief statement of what the organization needs to do over the next few years to be successful. 2. Determine the dominant value proposition - A differentiating set of offerings that customers place high value on. 3. Choose the key financial strategies - The optimal mix of revenue growth, productivity, and asset utilization for achieving the overriding objective. 4. Choose the key customer strategies - The key decisions around both revenue and customer-related cost reductions necessary to achieve the financial strategies. 5. Execute through the internal perspective strategies - The set of actions that need to be carried out to realize the plans and strategies that have been made to win the marketplace. 6. Plan the learning and growth strategies - The human capital, information capital, and organization capital that are necessary to execute all plans and actions. ## 24.1a Let's Look at an Example Suzy's Smoothies (SS) has been in business for three years. It sells freshly squeezed and blended fruit and vegetable health drinks, and operates 30 juice kiosks in shopping mall food courts and health and fitness clubs. Its two best-selling drinks are Keen Greens and Pumped-Up Pomegranate. Its primary market is 25- to 35-year-olds who are health-conscious and busy. Some drinks are protein enriched, and these are marketed as meal replacements on the go. Drinks sell for $4.50 to $7.00 depending on the size and ingredient combination. Growth in the past two years has been strong, and the number of SS juice bars has increased steadily to its current number. The overall market for healthy drinks is also growing; several new competitors have opened in the last year, each offering new and innovative ingredient combinations. In addition to an increasing number of competitors, there may be more challenges ahead, as recent global events have led to stock market drops over the past couple of months and there is speculation that a prolonged economic downturn could be coming. Another concern is that two outbreaks of E. coli in the province in the past six months have been traced to sprouts and watercress, both of which are key ingredients in the Keen Greens drink. SS takes great pride in the fact that its storage, handling, and drink production processes consistently stress health and food safety. One of SS's board members, a former health inspector, was instrumental in helping SS set up its processes and equipment in a manner that far exceeds safety regulations. Talk in the industry is is that the health and safety board is going to impose stricter regulations on these types of ingredients when they are used raw. The government has announced that it will begin a series of consultations and focus groups to evaluate the issue. SS's board has tasked management with building a strategic map to provide a visual representation of the organization's strategy using the steps outlined above. ### Step 1: Specify an Overriding Objective SS has several key objectives, but the most important is likely to improve SS's financial health and cushion the organization from the anticipated financial downturn. If management is not able to achieve that objective, SS will not be able to remain in business. ## **Step 2: Determine the Dominant Value Proposition** Customers of SS place high value on health-conscious products, so this is the main value proposition. ## Steps 3-6: Develop Financial, Customer, Internal Perspective, and Learning and Growth Strategies Next, strategies are selected that support SS's current situation and arranged as a strategy map: - **Financial**: Improve financial health. Cushion from future financial downturn. - **Customer**: Attract new customers. Provide health-conscious products. High Safety standards. - **Internal**: Food Safety practices - **Learning and Growth**: Organizational: food safety. Human capital: food safety knowledge. Note that strategies can be linked, as shown with the arrows in the above strategy map. The customer strategies help support the financial strategies. Internal business process strategies are selected to support the customer strategies, and the learning and growth strategies are linked to the internal business process strategies. For example, SS has a goal of cushioning itself from a future potential downturn. To be able to do this, high safety standards are required because if there were to be an E. coli outbreak at SS, the organization would likely suffer from decreased customers and revenue. To support the customer goal of providing high safety standards, an important internal business process strategy will be focusing on food safety practices. Finally, learning and growth strategies of understanding food safety regulations and increasing staff food safety knowledge will support the internal strategy of improving food safety practices. ## 24.2 Building the BSC As described in the Balanced Scorecard - Overview chapter, the balanced scorecard (BSC) is a performance measurement and management system that helps management measure the success of the execution of a chosen strategy. There are many correct approaches to creating a BSC. One step-by-step approach that can be used, or modified, is as follows: 1. Choose the perspectives framework. Many organizations use the four perspectives discussed above: financial, customer, internal business process, and learning and growth - but an organization can choose whatever perspectivesbest balance a present view of results with indicators of future results. As well, consider the internal perspective, the external perspective, and the needs of the various stakeholders. 2. Pick the goals for each perspective. This means there should be a different set of goals for financial, customer, internal business, and learning and growth (or whichever perspectives have been chosen). These goals can be interrelated but should not be the same. For example, a goal in the customer perspective may be to grow the number of sales per customer by 10%. A related goal in the learning and growth perspective may be to provide training to the sales team to better understand the products sold so that salespeople can better meet customer needs. 3. Establish the appropriate measure (or set of measures) that will accompany each BSC goal. At this point, just the measure is being selected, not the target or how the results will be assessed. Be sure not to select too many measures, or the focus on each measure will be diminished. Generally speaking, four to seven measures per perspective is enough to enable effective strategy execution. 4. Decide on the specific quantitative representation, or target, that will later indicate (by comparing it to actual results) whether a goal has been achieved. Consider the SMART (specific, measurable, attainable, realistic, and timely) approach to selecting the target for each goal. 5. Compile the results. The result is a numerical score to assist in assessing the success of the organization. While having too few measures is less than ideal, trying to measure too many items is even worse, as it will consume significant amounts of time and distract from the key purpose of the organization. Focus on the measures that are most important to the organization's success. ## 24.2a Let's Look at an Example To continue the SS example from above, SS's board would now like to use a BSC to monitor and measure its key metrics related to its strategies developed in the strategic map. ### **Step 1: Choose the Perspectives Framework** SS has a variety of internal and external stakeholders, so all four perspectives should be used: financial, customer, internal business process, and learning and growth. ### **Step 2: Pick the Goals for Each Perspective** Based on the information about SS provided above, appropriate goals for each perspective could include: - **Financial**: Improve the financial health of SS. Cushion SS from anticipated financial downturn. - **Customer**: Attract new customers. Provide health-conscious products to customers. Provide products prepared with high safety standards to customers - **Internal Business Process**: Increase food safety practices. Increase employee food safety knowledge. - **Learning and Growth**: Understand regulations related to food safety. ### **Step 3: Establish the Appropriate Measures** After goals are set, measures for each perspective can be established. The following are possible measures that may be used by SS for its BSC: - **Financial**: Increase in net income; cash balance. Strengthen return on equity; current ratio. - **Customer**: Market share growth. Strong customer satisfaction. Low number of customer complaints. - **Internal Business Process**: Percentage of wasted ingredients as a result of food safety concerns. Costs of quality as a percentage of sales. Food safety courses successfully completed by employees. - **Learning and Growth**: Number of food safety training hours. It is important to note that the perspectives of the BSC have an interrelated cause-and-effect flow, similar to the strategic map. SS wants to ensure that its staff training expenditures have positive effects within the organization. Additional budget spending on employee skills (for example, food safety courses) should have benefits for business processes, increasing customer satisfaction and ultimately resulting in higher financial returns. Overall, it is important for organizations to understand the impact that one perspective/dimension can have on another. Organizations must ensure that activities related to one dimension of the BSC do not negatively impact another. Step 4 involves setting specific numerical targets for each measure, which are better established when detailed information has been gathered about SS's current performance. If more information on SS was provided, SMART targets could be set. For example, if SS's current market share is 20%, the target may be set to capture 25% of the market. For net income, if current net income is $250,000, the target may be $300,000, which is a 20% increase. Finally, Step 5 is compiling the results of the BSC and comparing them to the targets after the BSC has been implemented. ## 24.2.1 BSC at the Employee Level Although the BSC usually starts at the organization level, opportunities exist to create scorecards at lower levels of the organization (such as departments). In some cases, individual scorecards derived from the main BSC are built for key (or even all) employees. ## 24.2 b Let's Look at an Example Shirtz Ltd. is a new business entering the custom T-shirt space. A customer will upload a picture from their phone to the Shirtz app and receive a customized T-shirt with the uploaded picture. One of the BSC organization goals for the internal business perspective for Shirtz is quick turnaround time; the measurement is the manufacturing order time (from when the customer places the order to when it is delivered), and the target is 72 hours (three days). While Shirtz has done this goal and measure at the organization level, it wants to roll it out to the individual employee level. George Greenwood works in the production department. His job is to receive the picture and verify that the quality is suitable and appropriate for printing. George would like to develop two suitable individual goals, measures, and targets related to the organization goal and measure. As the turnaround time is critical to the business, the timing of how quickly George reviews the pictures should be the focus of the measures, however, this needs to be balanced with the effectiveness of his review. George could be quick but, if he approves inappropriate pictures, it will create hardships for the organization down the road. | Goal | Measure | Target | |---|---|---| | Quick Turnaround Time | Manufacturing order time | 72 hours | | Quality photos are approved | Proportion of photos approved for printing that meet quality standards | <0.5% of photos approved are not suitable quality for printing | | Photos are reviewed in a timely manner | Time between receiving photo and approval | <10 minutes on average | While only two measures were identified here, an overall numerical score would be determined for George after capturing all his respective measures. A similar process is undertaken on the organization level, as the goal of a BSC is to produce an actual "score" for the organization. ## 24.2.2 Practical Tips In building a comprehensive, high-quality BSC, the following key guidelines can be used: 1. Each perspective should contain four to seven goals (each goal will have at least one measure, possibly more). Having fewer than four creates a risk of a perspective being underrepresented; more than seven makes tracking cumbersome and can take the spotlight off a few critical factors. 2. There should be a blend of leading indicators and lagging indicators. This is part of the balance in a BSC and demonstrates the cause-and-effect logic built into the strategy. 3. The quality of measures provided in a BSC is more important than the quantity. High-quality measures are linked in a meaningful way to the organization's goals. The BSC initiative should be revisited regularly to ensure goals, measures, and targets are still appropriate. As the organization's strategy evolves or changes, goals may no longer be appropriate. When goals change, measures must also change to reflect the organization's new strategic direction. or targets must be updated. ## 24.2.3 Link to Strategy Mapping The BSC is highly interlinked with the concept of strategy mapping. Through strategy mapping, employees can see the cause-and-effect relationships among the four BSC perspectives (strategy maps use the BSC perspectives as a framework) and gain a better understanding of how the job they perform every day affects the organization's ability to achieve its strategic objectives. Generally speaking, strategy mapping is primarily used to set and communicate strategy, while the BSC is used to measure progress toward strategy. In most cases, the BSC is used to translate mission and strategy into tangible objectives and measures. The BSC contains the specifics (such as dollar figures, percentages, or hours or days of cycle time) to articulate and measure the objectives set out by the strategy map. The BSC and strategy map can be done independently of one another; however, there are synergies in doing both together. As a pairing, they cover the complete strategy cycle, from inception/formulation through to the systematic assessment of actual performance against expectations. Neither is necessarily better; however, depending on an organization's needs, one may be more beneficial than the other. ## Lesson 2: Balanced Scorecard - In-Depth - Summary Problem ### **Competencies:** - 3.1.1 Evaluates management information requirements - 3.1.2 Documents and assesses business processes, systems and data requirements and recommends improvements to meet information needs - 3.6.1 Evaluates performance using accepted frameworks - 3.6.3 Evaluates root causes of performance issues ### **Learning Outcome:** - Determine goals, measures, and targets as part of the preparation of a BSC. ## **Summary Problem** Juicy Jewels (JJ), owned by Kim Kohl, specializes in a new trend in wedding proposals: edible sugar rings. The mission is "to be the premiere edible jewelry designer" and the vision is "a sparkle sugar ring on every sweetie around the world." Currently, JJ has 11 employees and is in its second year of business. Of the 11 employees, two are designers of new rings (as each design has a limited production run), five are in production (which includes shipping), two are office staff who oversee finance and general administration, one is a webmaster who updates and manages the website, and one is dedicated to social media. JJ has about 15 different rings to choose from online at any given time, but also accepts custom orders for an additional fee of $100. In addition, JJ sets up booths at wedding trade shows so that customers can try on the rings and see them in person. Due to the nature of the product, rings bought online need to be shipped quickly once ordered, and packaging is key to prevent breakage. The rings vary in price, from $249 up to $719 for the more complex designs. JJ has loyal, trendy customers who reorder rings for special events, but its main focus is on engagement rings. Customers are very excited about the product, and most of JJ's new customers are acquired through word of mouth. The sugar rings are very popular on sites like Instagram and Pinterest and have been featured by several influencers. While customers commonly have a "real" engagement ring as well, the sugar rings are the centre of many stylized engagement photoshoots. Kim wants to implement a performance measurement system to ensure that JJ is on target to reach its goals. JJ currently has a static budget, but Kim feels that isn't enough of a metric considering how quickly the organization is growing. ### **Required** Using the BSC as the base for the performance measurement system, state two suitable goals, measures, and targets for each of the four perspectives for JJ: financial, customer, internal business process, and learning and growth. ## **Solution** ### Financial Because JJ is a new organization, it doesn't have a lot of historical information. Thus, it is important to select appropriate measures for JJ. Ratios like debt to equityare not a good fit because there was no reference to JJ having loans. For the financial perspective, the best fit may be net margin and cash, because JJ needs to be profitable and keep a positive cash balance as a new organization to be successful. | Goal | Measure | Target | |---|---|---| | Profitable growth | Net margin ratio year-over-year increase | 5% year over year | | Positive Cash Flow | Operating-cash-flow-to-sales ratio | 29.2% | ### **Customer** As JJ seems to be operating in a niche market within the wedding space, brand awareness and customer satisfaction will be key to the successful execution of its strategy. | Goal | Measure | Target | |---|---|---| | Brand Awareness | Increase in followers on social media | Increase per month | | Customer Satisfaction | Customer satisfaction survey | 92% considered happy with product/experience | ### **Internal Business Process** As in most trend-based industries, the organization needs to move quickly in order to be leading the space. Both of the internal business goals are focused on timing: delivery and time to market. | Goal | Measure | Target | |---|---|---| | Quick Delivery | Time from order to delivery | 48 hours | | Designs quick to market | Days from design completion to production | Three days | ### **Learning and Growth** The designs are the focus of the business, so continually creating new products will be very difficult, and ensuring they will be popular even more so. Both of the learning and growth measures tie into design: the ability to sell the designs quickly and the ability to support employee creativity. | Goal | Measure | Target | |---|---|---| | Highly desirable designs | Time between production of new design and products being sold out | 60 days | | Employee creativity | Hours of attendance at fashion shows or other creative scenes for inspiration | 40 hours per year, per employee |