Balanced Scorecard Flashcards
Define Strategy
A strategy is some form of grand scheme or plan which sets out a vision or aim for where an organization wants to be in the longer term. Being strategic is the ongoing process of endeavouring to achieve an organization’s strategy.
Define Acting strategically
- establishing the aims and goals of an organization,
- planning and making decisions on how to achieve such aims,
- monitor performance against the
- aims along the way and take action when necessary to ensure realignment to these aims
Define Strategic Management Accounting
a term that has been assigned previously by some commentators to describe an amalgam of management accounting tools and techniques which inform management decisions and assist managers to design, manage and steer their organization in the direction of strategic intent
BSC Philosophy
creating strategic focus by translating an organization’s vision into operational objectives and performance measures covering four perspectives:
(1) the financial perspective,
(2) the customer perspective,
(3) the internal business perspective and
(4) the learning and growth perspective
For each of the four perspectives, an organization is encouraged to identify the main….?
I. objectives
II. then associated performance measures,
III. targets and
IV. initiatives which aim to increase the chances of reaching such objectives, measures and targets
Financial Perspective
financial performance objectives of an
organization, resulting from its strategy; it also conveys any financial impact from expected outcomes in the three other perspectives – a barometer of financial success
Typical measures include ROI, RI and EVATM
Other objectives include revenue, growth, cost reduction and asset utilisation
Customer Perspective
The customer perspective of a balanced scorecard focuses on organisation's markets and customers. There will be an ‘integration’ between elements of this perspective and any revenues-related elements of the financial perspective. Typical generic measures include: 1. Market share 2. Customer retention and loyalty 3. Customer acquisition 4. Customer satisfaction 5. Customer profitability
Internal Business Perspective
The internal business perspective captures the things which an organization must do well internally, if it is to attain its strategic goals. In deciding which aspects to incorporate into the balanced scorecard, an organization should try to identify those internal processes which will improve the opportunity for positive results being reflected in the customer and financial perspectives.
• Typical innovation measures include:
1. Percentage of sales from new products.
2. New product introduction versus competitors.
3. Product development break-even time.
• Typical operation process measures include:
Cycle time; Quality; Activity and process costs;
Post-sales service processes.
Learning and Growth Perspective
Focuses an organization and its employees on continual learning and its resource capabilities.
The main goal is ensuring that organizations continue to invest in their infrastructure (that is, people, systems and procedures) so as to nurture and maintain its ability to reach the objectives of the three other perspectives.
•Focuses on the infrastructure that the business must build to create long-term growth and improvement.
•Three principal categories identified:
1. Employee capabilities
2. Information system capabilities
3. Motivation, empowerment and alignment
Cause-Effect Relationship
key assumption that cause-and-effect relationships exist through and between the four different perspectives, ultimately impacting on the financial perspective. A cause-and-effect relationship defines where a particular outcome has occurred, due to some other happening. Organizations need to identify cause-and-effect relations
between things that the organization can do, and beneficial outcomes as a result of such actions. It is important for an organization to recognize and incorporate such cause-and-effect relationships when designing a balanced scorecard to strengthen the integrative nature of the tool which is designed.
E.g., Within Learning and Growth perspective – additional customer service training may have an effect on the customer satisfaction (customer perspective), this may have an impact on the ‘repeat’ business (Internal business processes) and therefore sales volume (Financial)
Lag indicator
outcome measure e.g. in the ‘learning and growth’ perspective for a firm of chartered accountants might be the number of newly qualified employees in a particular year
Lead indicator
performance driver, e.g. in the ‘learning and growth’ perspective for a firm of chartered accountants might be the number of new graduates beginning their professional training in a year
Relationship between strategy mapping, BSC and KPIs
Clarifying and translating vision and strategy:
- achieve consensus among senior leaders and avoid pet projects
Communicating and linking strategic objectives and measures:
- place objectives and targets into overall strategic context, engage people and allow feedback
Planning and target setting and aligning strategic initiatives :
- establish targets for each objective and use KPI to measure progress, targets should be stretching but achievable
Benefits of a BSC
- Better Strategic Planning: forces managers to think about cause-effect relationships which creates a complete picture of the strategy
- Improved Strategy Communication and Execution: maps strategy out on one piece of paper to engage staff and external stakeholders
- Better Management Information: forces design of KPIs so companies measure what matters
- Improved Performance Reporting: helps produce better performance reports and transparency by communicating strategy internally and externally
- Better Strategic Alignment: align organisation with objective ensures business and support units work towards same goal
- Better Organisational Alignment: align organisational processes like budgeting, risk management and analytics with strategy
Limitations of BSC
- Not linking measures to strategy: can’t just use off the shelve BSC but needs to be built based on cause-effect relationship
- Not validating the links: not validating the model leads to measuring too many things, and areas of performance that don’t have much effect on what really matters
- Not setting the right performance targets: Outstanding nonfinancial performance does not always translate into outstanding financial performance, i.e. 100% satisfaction doesn’t mean much more spending
- Measuring incorrectly: using metrics that lack statistical validity and reliability such as simplistic surveys with a 1-5 point scale of satisfaction
