Lecture 7: The Balanced Scorecard

Question 1

What was the problem that became the background to the BSC?

Answer 1

Performance management focuses too much on:
- financial measures
- historical outcomes
- short-term objectives

Question 2

What is the BSC and what does it provide balance between?

Answer 2

A framework for linking performance management to strategy implementation (make the fluff more concrete).

• short and long term objectives
• financial and non-financial measures
• lagging and leading indicators
• external and internal performance perspectives

Question 3

What perspective do managers often find that they lack when they start implementing the BSC?

Answer 3

The learning & growth perspective

Question 4

The actual metrics were not the invention of the BSC, but…

Answer 4

the systematisation and visualisation.

Question 5

Which of the perspectives of the BSC are leading and lagging?

Answer 5

• Process + Customer: quick leading metrics (in the near future)
• Financial: lagging
• Learning and growth: leading long-term

Question 6

What are the basic principles underlying the BSC?

Answer 6

• Builds on the idea: what gets measured gets done
• Strong link between performance measurement and strategy
• The importance of systematizing measures into (four) different perspectives
• A balance between non-financial and financial measures (leading and lagging indicators).

To use the BSC, we must believe in the basic principles.

Question 7

What is generation 1 of the BSC?

Answer 7

Using a balance of financial and non-financial measures, leading and lagging indicators, and external and internal perspectives. Creating better performance-measurement information.

Question 8

What is generation 2 of the BSC?

Answer 8

Linking the choice of performance measures to strategic objectives. Allowing individuals and teams to define what they must do well to contribute to higher-level goals.

Question 9

What is generation 3 of the BSC?

Answer 9

Identifying the cause-and-effect relationships between and within scorecard perspectives. Using scorecards for strategy refinement and implementation (strategy maps).

Question 10

How does the company’s vision and strategic objectives influence the gen 2 BSC?

Answer 10

It should be the basis for choosing performance measures. The vision and strategy statement should be formulated in an as concrete way as possible. Tries to take a holistic view on performance management.

Question 11

What components should exist in the BSC when following gen 2?

Answer 11

1. Vision/strategic objectives
2. Areas of focus
3. Critical success factors
4. Measures

Question 12

What are the different perspectives on performance to include in the BSC?

Answer 12

1. Objectives: What strategy must be achieved and what is critical to its success?
2. Measures: How success will be measured and tracked.
3. Targets: Performance expectations.
4. Initiatives: Key action programs required to achieve objectives.

Question 13

What are the four perspectives of the BSC?

Answer 13

• Financial.
• Customer.
• Internal business process.
• Learning and growth

Question 14

What is the financial perspective of the BSC?

Answer 14

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

Indicates whether the company’s strategy, implementation and execution are contributing to bottom-line improvement.

Cash flows, sales growth, operating income by division, market share by segment, ROE. Profitability, growth and shareholder value.

Question 15

What is the customer perspective of the BSC?

Answer 15

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

Translate the general mission statement on customer service into specific measures that reflect the factors that really matter to customers.

Categories: Lead times, quality, performance and service, costs.

Question 16

What is the internal business perspective of the BSC?

Answer 16

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

Managers need to focus on the critical internal processes that enable the company to satisfy customer needs.

Critical processes and competencies. Cycle time, quality, employee skills, productivity.

Question 17

What is the learning and growth perspective?

Answer 17

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

Continual improvements to existing products and processes, and introduce new ones.

New product launches, value creation for customers, operating efficiencies.

Question 18

Are the BSC perspectives balanced in reality?

Answer 18

No. Out of the 10 most popular performance measures, 5 are financial (still focused on).

Question 19

How many measures should you focus on in the BSC?

Answer 19

2-4 metrics per perspective is often sufficient. It is easier to process the perspective than all individual metrics.

Question 20

How often should we evaluate the measures in the BSC?

Answer 20

For balance: all perspectives continuously.

If financial monthly, ideally we should measure the other perspectives as often.

If not entirely possible, at least 1 metric from each perspective should be measured at that rate. Otherwise it is like we signal that one perspective is more important than the others.

Question 21

On which levels in the organization can the BSC be implemented?

Answer 21

Can be adapted and implemented to all levels in an organization. Hence we can have different scorecards depending on where we are in the organization.

Question 22

How should we use the BSC in relation to compensation?

Answer 22

Tie all BSC perspectives to the incentive system, and hence not only base rewards on financial measures.

Can put weights on each perspective: ideally equal weight.
Not >40% or <15 for any area.

Question 23

What is generation 3A of the BSC?

Answer 23

The linked BSC. Making the causal links between measures explicit. Can be seen as unnecessary since if we did not believe in the links, the original BSC would be useless

Question 24

What is generation 3B of the BSC?

Answer 24

Strategy maps - increased focus on strategy implementation. Aids visualisation of the organisation’s strategy. Has been criticised for bringing us back to the “fluff” again - the metrics are not part of the scorecard anymore

Question 25

How can we include sustainability in the BSC?

Answer 25

• As a separate sustainability perspective - what the majority does. There is a risk that it becomes too separate from operations however.
• Put it as an integrated part into the other perspectives to signal that it runs through the entire company.
• Triple bottom line

Question 26

What benefits can measuring non-financial performance areas offer?

Answer 26

• Quicker glimpse of business progress for managers
• Better information to employees on specific actions needed to achieve strategic objectives.
• Better sense of the company’s overall performance for investors.

Question 27

What are common mistakes companies make when trying to measure non-financial performance?

Answer 27

• Not linking measures to strategy
• Not validating the links. Prove that they affect future financial results.
• Not setting the right performance targets. Short- vs long-term.
• Measuring incorrectly. Validity and reliability.

Question 28

What are some practices that can allow companies to realise the promise of non-financial performance measures?

Answer 28

1. Develop a causal model based on the strategic plan.
2. Pull together the data.
3. Turn data into information. Statistical methods like correlation analysis and multiple regressions. Other qualitative methods/analyses.
4. Continually refine the model. Ongoing and regular assessment of results. Environmental changes can impact. Find the drivers of the drivers.
5. Base actions on findings. Conclusions drawn from data must be used in decision making if non-financial performance measures are to improve financial results.
6. Assess outcomes. Determine whether the action plans and investments that support them actually produced the desired results.

Question 29

Environmental issues are taken more seriously after…

Answer 29

… their connection to financial profitability has been made

Question 30

What is the corporate balanced scorecard (CBSC)?

Answer 30

Instead of business unit level, “a corporate-level scorecard establishes a common framework, a corporate template, about themes and common visions that must be implemented in the scorecards developed at the individual SBUs. The corporate scorecard also establishes how the corporation adds value beyond the value created by the collection of SBUs operating as independent units.”

Question 31

What are 2 differences between BSC and CBSC?

Answer 31

• CBSC focuses on relationships between the top management and business unit managers, instead of concentrating on implementing and developing business strategy for competitive advantages in the business landscape.
• Managers at the corporate level are responsible for managing both internal and external (reporting and communication with capital market actors) expectations.

Question 32

What is corporate control?

Answer 32

The process to coordinate and influence behavior of managers of decentralized business units to realize company synergies.

Question 33

Is CBSC use linked to corporate control?

Answer 33

Out of 15 of Sweden’s largest multinational companies, 8 adopted CBSC. However, corporate control was financially focused in all companies; mainly financial measures were important, standards were only set for financial measures and rewards were largely based on financial performance measures.

Need for simplicity and comparability internally, and capital market pressures motivated the financial focus.

Question 34

What can the popularity of the BSC be explained by?

Answer 34

1. Systematizing the various measures into perspectives; fosters a balance among different strategic measures in an effort to achieve goal congruence.
2. Fast but comprehensive view of the business, presented in a single management report.
3. Helps to safeguard against sub-optimization by forcing managers to focus on all four perspectives together. Allows to see whether improvements in one perspective have been achieved at the expense of another.
4. Gives a way to mentally organize the large number of performance measures that may otherwise lead to measurement overload.
5. Emphasizes the link between mission, goals, strategies and performance measurement. Helps employees understand how they can contribute.
6. Forces managers to think clearly about their mission, goals, and strategies, and to specify quite clearly the timescales in which they hope to achieve their strategic objectives.
7. Emphasizes (explicitly or implicitly) the idea of cause-effect relationships among measures. Can lead to a better understanding of how non-financial measures drive financial measures.

Question 35

What issues are related to implementing a BSC?

Answer 35

• Top management commitment and employee involvement. Participation and support of top managers in combination with involvement of lower-level managers and employees.
• Review measures and results frequently. Create a formal mechanism for updating the measures to align with changes in mission, goals and strategies.
• Avoid measurement overload and reflect on the link to incentive systems. Selective about measures. Incentive systems should consider all perspectives to avoid goal incongruence.

Question 36

What are the 4 processes for managing strategy with the BSC (linking strategy, gen 2)?

Answer 36

In a loop:

• Translating the vision: build consensus around strategy, how day-to-day can contribute to its realisation
• Communicating and linking: to departmental & individual objectives. Educating those who should execute it.
• Business planning: basis for allocating resources and coordination.
• Feedback and learning. Modify strategy to reflect real-time learning