Session 10: Balanced Scorecard, Performance Measurement Systems Flashcards
Why is performance measurement essential?
It links strategy and operations.
Why are financial measures alone not enough to measure performance?
– Lagging/historic (not leading) measures of performance
When figures are bad, it’s already too late!
When good, likely reflects previous accomplishments!
– Inward looking e.g. ‘sales’ versus ‘market share’
– May encourage short-term decision-making
e.g. meet EPS expectations by cutting spending that drives future profits
– Give minimal insight on our strategic objectives, the drivers
of future performance and what managers should focus on
e.g. no ‘real time’ insight and feedback on how we will improve; i.e. Generic
What are some ways to overcome the limitations of traditional financial measures?
• Improve and carefully choose financial metrics (e.g. EVA)
• Promote maximisation of value for the long term
(whilst not neglecting short term expectations and performance delivery)
• Provide long-term incentives (ideally equity based with
extended holding periods)
• …and definitely add strategic non-financial metrics e.g. to guide operational improvements in order to actually achieve/implement the strategy, so companies must develop a balanced set of strategic financial and non-financial metrics.
What are the five key measures of a Balanced Scorecard?
• Financial and non-financial
• Leading and lagging indicators
i.e. a balanced picture of current performance, as well as the drivers of future performance
• Reflecting strategic objectives e.g. for target customer
segment(s) & customer value proposition
– Not generic, & Not hygiene/diagnostic measures
• Consistent and mutually reinforcing e.g. cause and
effect relationships across measures
• ‘Hard’ ideal, but ‘soft’ whenever necessary – don’t
measure what is measurable rather than what really matters!
What is a Balanced Scorecard (BSC)?
A balanced scorecard is a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Balanced scorecards are used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information and use it to make better decisions for the organization.
- A balanced scorecard is a performance metric used to identify, improve, and control a business’s various functions and resulting outcomes.
- It was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information.
- The balanced scorecard involves measuring four main aspects of a business: learning and growth, business processes, customers, and finance.
What is most critical for BSC support?
The CEO / Executive Leadership
Should all four perspectives be present on the BSC?
Yes, but there is no mathematical theorem that demonstrate all are necessary or in equal measure.
What is Value-Based Management (VBM)?
Value Based Management (VBM) is the management philosophy and approach that enables and supports maximum value creation in organizations, typically the maximization of shareholder value. VBM encompasses the processes for creating, managing, and measuring value.
What is strategy?
A Strategy describes how an organization aims to create
value; effectively, a set of hypotheses about cause-and-effect
What is a strategy map?
-A Strategy (or Success or Cause-and-Effect) “Map”, is a visual representation of the perceived relationships between:
► the key success factors (i.e. performance
drivers) at each dimensions of a BSC (typically: learning
& growth, internal processes, customer and financial)
► the achievement of the overall strategy of the
organization for value creation.
- It translates strategy into meaningful and motivational goals for middle and lower managers
- Strategy maps are typically associated with the BSC, and contain shapes (usually ovals) and arrows to express flow.
What is typically found in every BSC?
• One page
• For development:
- Strategic analysis by Top Management
- Objectives + Measures
• For regular use: Measures + Targets + Actuals + Initiatives
• Quarterly or monthly reporting
• Avoid high aggregation – cascade through organisation
• c.¼ financial, ¾ non-financial
c.¼ external perspective, ¾ internal perspective
c.¼ historical, lagging indicators, ¾ leading indicators
What is a Leading Indicator?
A leading indicator is any economic factor that changes before the rest of the economy begins to go in a particular direction. Leading indicators help market observers and policymakers predict significant changes in the economy.
Leading indicators aren’t always accurate. However, looking at leading indicators in conjunction with other types of data can help provide information about the future health of an economy.
For instance, many market participants consider the yield curve, specifically, the spread between two-year yields and 10-year yields, a leading indicator. This is because two-year yields in excess of 10-year yields is correlated with both recession and related market turbulence.
What is a Lagging Indicator?
A lagging indicator is any measurable or observable variable that moves or changes direction after a change has occurred in a target variable of interest. Lagging indicators confirm trends and changes in trends. They can be useful for gauging the trend of the general economy, as tools in business operations and strategy, or as signals to buy or sell assets in financial markets.
KEY TAKEAWAYS
- A lagging indicator is something that changes or occurs after a significant shift in a target variable has occurred.
- A lagging technical indicator is one that that trails the price action of an underlying asset, and traders use it to generate transaction signals or confirm the strength of a given trend.
- In business, a lagging indicator is a key performance indicator that reflects some measure of output or past performance that can be seen in operational data or financial statements and reflects the impact of management decisions or business strategy.
What do leading and lagging indicators have to do with the BSC?
The classic example of a leading or lagging indicator is that across the perspectives of a balanced scorecard.
The idea of leading and lagging indicators that Kaplan and Norton popularised is that the leading indicators of one perspective lie in the perspective BELOW the one you are looking at.
Some will argue that the lagging indicators are seen as those that are outside the organisation, for instance those that are indicators of the customers meeting their needs or financial results. The leading indicators are those in the organisation. This is very simplistic.
Treating leading and lagging indicators as merely in organisation and outside the organisation is simplistic because most organisations would look at their own productivity statistics and measures (in the process perspective) and say they were looking for indicators that their own performance will be improving. In other words they are looking for leading indicators below the process perspective. This means they are typically looking for leading indicators in the balanced scorecard’s learning and growth perspective.
In reality, you can do leading and lagging indicators along a perspective. For instance sales enquiries is a leading indicator of potential sales.
Whether an indicator is leading or lagging for you, all depends where you are sitting: In the organisation as a whole, in sales, in production, in finance, in HR.
How is ‘balance’ achieved in the Balanced Scorecard?
- Performance is assessed across a balanced set of dimensions
- Quantitative measures are balanced with qualitative measures
- There is a balance of backward-looking measures and forward-looking measures
