Balanced Scorecard

Bruce C HartmanMGT 400

Operating Assumptions for the Information Age

• Cross Functions• Links in Supply Chains• Customer Segments• Global Scale• Innovation• Knowledge Workers

The Value ChainCustomer need identified

Customer Need satisfied

BSC as a Management System

• Defined top-down by strategy

• Balances– External and

internal processes– Outcomes (lag) and

drivers (lead)– Objective and

subjective factors

Goals of BSC

• Clarify and translate vision and strategy

• Link measures with strategic objectives

• Plan set targets and align

• Enhance feedback and learning

Financial Accounting vs BSC

• Why won’t financial accounting measure the right things?

• The HBS Council on Competitiveness gives these reasons.

Less supportive of long term investment

Emphasis on short term returns, improving current share prices

Favors readily measurable returns

Underinvestment in tangible assets where short term returns cannot be seen

Overinvestment in acquisitions rather than internal development projects

Easily valued assets rather than hard-to value assets

Can operate inefficiently while short term earnings are ok.

Companies with strong asset bases don’t have to exploit undervalued assets with hostile tender offers, leveraged buyouts, junk bonds.

Lack of Transparency• A high-level committee of the AICPA on financial

reporting says a more balanced(!!) approach to reporting is needed.– Provide more information about plans,

opportunities, risks and uncertainties. (SWOT? E&I Audit?)

– Focus more on factors that create long term value

– Focus more on non-financial measures like how key processes are performing

– Align info reported externally with info reported internally to senior management

Types of Measures

• Outcomes– Final results: e.g.?– Lagging indicators

• Performance Drivers– Targets for process performance: e.g.?– Leading indicators

Strategy as Theory

•Strategy is a theory.

•It’s about chains of cause and effect.

•Can’t be proved! Only can be proved false!

•Based on assumptions.

•Strategic assumptions and plans cause decisions which causes what we do which results in outcomes.

Strategy Decisions Execution Outcomes

Disproving the Theory• If Strategy theory is right then:

– the plans cause the decisions which cause the effects.– the Performance Drivers should change as predicted.– the Outcomes should change in the predicted direction.

• If a measure does not change as anticipated, what could be wrong?– An assumption could be wrong or not apply.– A causal link could not work as expected.– There might not be a causal link– only coincidental.

• The theory is disproved!• What do we do?

• Modify the theory!

Double Loop Learning

• What is double loop learning?

Strategy Decisions Execution

Measures let us question if assumptions are valid or causal links are effective

Measures tell if we are implementing the strategy as planned.

How do we modify the theory?

• It’s like analyzing experimental results in science.

• Like cosmology or evolution.

• A company dialog is required!!

Types of Measures

• Financial• Customer• Internal and Business Value Chain• Learning and Growth

Framework for Translation

Chain of Causality

•You need a mix of measures

•Outcomes

•Performance drivers

Where to start?

• Authors say:– it’s easier to drive a BSC top down than up.– Why?– it is easier to define a Balanced Scorecard for

an SBU than for a complex corporation.– Why?

• This is based on their consulting experience.

Example

• Department of Energy Procurement Unit• FAA Logistics Center• UCSD• Oak Knoll Academy• Balanced Scorecard Institute has other

examples.