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Learning 2XL

Management Tip

Using the Balanced Scorecard 2XL at Business Planning

 

‘What gets measured gets done’ wrote Robert Kaplan and David Norton in their article in the Harvard Business Review, 1992.  Of course, if finance is the only measure of success, all other initiatives for improvement will be drowned in the race for profit.  Kaplan and Norton suggested that using other measures such as:

  • the customers perspective
  • the company’s internal perspective
  • innovation and improvement

would encourage a more balanced approach to management, and allow an organisation to establish more long-term goals.

The ‘Balanced Scorecard’ is the result of the work of Robert Kaplan (Professor – Harvard University) and David Norton (President Renaissance Solutions Consultancy), working with American companies in the 90’s through their consultancy work with the Harvard Business School.  Their findings were published in 1992 –96 through 2 major features in the Harvard Business Review, and were subsequently published as a book in 96. 

(Read: Kaplan R.S. and Norton D.P., The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, 1996)

What was the problem?

Initially, their work with private companies focused on why companies, who met their initial financial goals, regularly failed to grow and thrive and eventually lost market share.

They discovered that boards of Directors who simply asked for more profit were leaving their companies open to long-term crises.

 

The Hoover vacuum cleaner fiasco

In the early 90’s everyone was astonished to be offered free USA flights with a new Hoover product over £100.  The initiative nearly bankrupted the company.

The short term goal was to clear out excess stock – this was achieved in a very short time, but at what cost! The company lost about £50 million and its directors lost their jobs. They forgot to factor in customer response, and their subsequent failure to honour the promise finished the company off in the UK and lost them their royal warrant.

Xerox copiers

In the mid 70’s Xerox had a virtual monopoly on photocopiers. They did not sell but leased machines and sold supporting products at a high profit. Soon customers got fed up with the high breakdown rates. Xerox then initiated sales of machines together with an expensive after sales repair service. Customers bought second machines to back up the first which had broken down. At this stage Xerox profits were very high on all fronts.

When other companies, especially Japanese, produced better designed machines at lower cost in 1975, Xerox suddenly lost all its customers and it almost failed. It was only through addressing quality and customer service did Xerox turn around from failure.

 

Origins of the Balanced Scorecard

Kaplan and Norton’s premise for the balanced scorecard is that performance must address other aspects of the organisation’s work beside the financial.

If profit is the only measure, then managers will focus on that to the exclusion of other areas of work, such as quality, customer satisfaction, employee morale etc.

And yet may achieve in the short term.

Public Sector

How does this reflect on councils, who are not profit makers?

Where do councils traditionally focus when business planning?

Possibly:

  • Cost cutting ( at risk of quality and customer care)
  • Reduction in complaints ( at risk of catering only for those who complain)
  • Fulfilling statutory duties (at risk of failing to develop the community)
  • Public image ( at risk of openness and transparency)
  • Political dogma (at risk of failing to listen to the community)
  • (lately) performance indicators (at risk of poor quality generally or in lesser services or staff overload)

The danger is to make one of the above of overriding importance so that officers neglect to plan for, monitor and report on all the other aspects.

The classic Balanced Scorecard focuses on the 4 main aspects of achieving long term business success

Deciding on targets and measures

It’s not enough to simply answer these questions – we need hard measures that communicate to everyone exactly what must be done to achieve real success. The scorecard ensures that the targets are balanced and realistic, and that there is no ambiguity about what is important. 

It’s the discussion about the targets and measures that help to communicate the scorecard and shape it into a real plan that is a good basis for a business plan.

Look at the following strategic thinking (read the ‘Objectives’ column vertically in table at end) to see how the scorecard can develop into a strong plan:

Vision and Mission: To increase profits dramatically by giving customers better value

We will achieve this by:

(Financial goal) Seeing an increased return on our investment by greater volume of sales

We will achieve this by:

(Customer goal) Customers choosing us first because they feel that they get extremely good value for money

We will achieve this by:

(Internal Process goal) Reducing manufacturing costs per unit and increasing stock availability

We will achieve this by:

(Learning and Growth goal) Focusing on better use of resources and fewer errors, and improving our marketing

 

Okay – then what?

Each of these goals has to be thought through carefully and spelt out in terms of facts and figures. 

Now look at this strategy developed into a scorecard.  You will see the strategy appears vertically under the column headed ‘Objectives’, but read each one on the horizontal line and you will see how it has now become a plan – unambiguous, achievable, motivational.

 
  Objective Measure Target

Initiative or

Action Plan

Financial

Increased return on investment Sales growth 5% increase in all products Increased sales from existing customer (customer loyalty)
  Increased return on investment Market Share Market share 25% as above

Customer

Perceived value for money Customer survey Rated no.1 by 75% of customers Focus Group

Internal

Processes

Reduce manufacturing costs to reduce selling price Unit price reduced Reductions on 10% of lines by end financial year Business process reengineering
  Improve stock availability Customer order waiting list reduced All sizes in stock New computerised stocking system

Learning and growth

Focus on resource efficiency Reduction in waste 35% reduction in reworking and rejects Supervisor training and incentive programme
  Develop customer database % of customers with purchasing history known 80% in 2 years Customer Database Sales Learning System
 

Statement of what is to be achieved if the strategy is to be successful and the vision realised

How success in achieving the objectives will be measured and tracked

The level of performance or rate of improvement needed over a specific time-scale

Key action programmes required to achieve objectives

 

 

Information on a Balanced Scorecard workshop or phone 07514 031549