Strategic Financial Management-Balanced Score Card: Assignment-2

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ASSIGNMENT-2

STRATEGIC FINANCIAL MANAGEMENT-


BALANCED SCORE CARD
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BALANCED SCORE CARD

A Balanced Scorecard defines what management means by "performance" and measures


whether management is achieving desired results. It complements the financial measures with
operational measures on customer satisfaction, internal processes, and the organization's
innovation and improvement activities—operational measures that are the drivers of future
financial performance.

These measures typically include the following categories of performance:

 Financial performance (revenues, earnings, return on capital, cash flow);


 Customer value performance (market share, customer satisfaction measures, customer
loyalty);
 Internal business process performance (productivity rates, quality measures,
timeliness);
 Innovation performance (percent of revenue from new products, employee
suggestions, rate of improvement index);
 Employee performance (morale, knowledge, turnover, use of best demonstrated
practices).

Methodology

To construct and implement a Balanced Scorecard, managers should:

 Articulate the business's vision and strategy;


 Identify the performance categories that best link the business's vision and strategy to
its results (e.g., financial performance, operations, innovation, employee
performance);
 Establish objectives that support the business's vision and strategy;
 Develop effective measures and meaningful standards, establishing both short-term
milestones and long-term targets;
 Ensure companywide acceptance of the measures;
 Create appropriate budgeting, tracking, communication, and reward systems;
 Collect and analyze performance data and compare actual results with desired
performance;
 Take action to close unfavorable gaps.

Common uses

A Balanced Scorecard is used to:

 Clarify or update a business's strategy;


 Link strategic objectives to long-term targets and annual budgets;
 Track the key elements of the business strategy;
 Incorporate strategic objectives into resource allocation processes;
 Facilitate organizational change;
 Compare performance of geographically diverse business units;
 Increase companywide understanding of the corporate vision and strategy.
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1. The financial perspective

Financial perspective addresses the question of how shareholders view the firm and which
financial goals are desired from the shareholders perspective. The specific goals depend on
the company’s stage in the business cycle.

For example:-

 Growth stage- the goal is growth, such as revenue growth rate.


 Sustain stage:- goal is profitability, such as ROE, ROCE, and EVA.
 Harvest stage:- goal is cash flow and reduction in capital requirements

The following table outlines some examples of financial metrics

Objective Specific measures


Growth Revenue growth
Profitability Return on equity
Cost leadership Unit cost

2. The customer perspective

The customer perspective addresses the question of how the firm is viewed by its customers
and how well the firm is serving its target customers in order to meet the financial objectives.
Generally the customers view the firm in terms of time, quality, performance and cost. Most
customer objectives fall in to one of the four categories. The following table outlines some
examples of specific customer objectives and measures. :-

Objective Specific measure


New products % of sales from new products
Responsive supply Ontime delivery
To be preferred supplier Share of key accounts
Customer partnerships Number of co operative
efforts

3. The business process perspective

Internal business process objectives address the question of which processes are most critical
for satisfying the customers and shareholders. These are the processes in which the firm must
concentrate its efforts to excel. The following table outlines some examples of process
objectives and measures.

Objective Specific measure


Manufacturing excellence Cycle time, yield
Increase productivity Engineering efficiency
Reduce product launch Actual launch date vs.
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delays Plan

4. Learning and growth perspective

This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self improvement. In the current climate of rapid technical changes
and global competition, it is becoming necessary for an organisation to learn compulsorily.

A company's ability to innovate, improve, and learn ties directly to the company's value. Only
through the ability to launch new products, create more value for customers, and improve
operating efficiencies continually can a company penetrate new markets and increase
revenues and margins—in short, grow and thereby increase shareholder value.

The integration of these four perspectives can be shown in a graphical way as:-

Objectives, measures, targets and initiatives

For each perspective of the balanced score card, four things are monitored.
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 Objectives- major objectives to be achieved. For eg, profitable growth.


 Measures- the observable parameters that will be used to measure progress towards
reaching the objective. For example, the objective of profitable growth might be
measured by growth in net margin.
 Targets:- the specific target values for the measures, for example, 7% annual decline
in manufacturing disruptions.
 Initiatives:- projects or programmes to be initiated inorder to meet the objective.

The measurements should be focused on a single strategy and be linked, consistent and
mutually reinforcing. Some generic measurements are presented in the table below.

Perspective Generic Measurements

Financial Return of Capital Employed, Economic value added, Sales


growth, Cash flow

Customer Customer satisfaction, retention, acquisition, profitability,


market share

Internal business Includes measurements along the internal value chain for:
process
Innovation - measures of how well the company identifies the
customers’ future needs.

Operations - measures of quality, cycle time, and costs.

Post sales service - measures for warranty, repair and


treatment of defects and returns.

Learning and growth Includes measurements for:

People - employee retention, training, skills, morale.

Systems - measure of availability of critical real time


information needed for front line employees.

CHARACTERISTICS

The characteristics of a balanced score card are as follows:-

 It presents a mixture of financial and non-financial measures each compared to a


'target' value within a single concise report.
 Balanced score card is not meant to be a replacement for traditional financial or
operational reports but a succinct summary that captures the information most
relevant to those reading it.
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 It is the method by which this 'most relevant' information is determined (i.e. the
design processes used to select the content) that most differentiates the various
versions of the tool in circulation.
 It is flexible.
 The Balanced Scorecard translates Mission and Vision Statements into a
comprehensive set of objectives and performance measures that can be quantified and
appraised.
 Balanced score card allows managers to consider both soft and hard types of measures
in a balanced way.
 The balanced scorecard provides a framework for managers to use in linking different
types of measurements together.

WHAT DO YOU TRY TO BALANCE IN A BALANCED SCORE CARD?

An important part of the balanced scorecard concept is the emphasis on establishing a balance
between four types of measurements. These types of measurements include:

    1) Short term and Long term, 

    2) External (for shareholders and customers) and Internal (for critical business
        processes, innovation, and learning and growth), 

    3) Leading indicators (outcomes desired and performance drivers) and 


        Lagging indicators (outcomes),

    4) Objective measures (e.g., financial) and Subjective measures (e.g., many
        non-financial). See the Exhibit below (item 7) for the idea.

BALANCED SCORECARD PERSPECTIVES & SAMPLE MEASUREMENTS

Short
Financial vs. Term vs.
Generic Non- Long Leading vs. Internal vs.
Perspective Measurement financial Term Lagging External

Financial ROCE, Financial Short term Lagging External


EVA, Financial Short term Lagging External
Sales growth Financial Long term Lead & External
Lagging

Customer Profitability, Financial Short term Lead & External**


Market Share, Non-financial Long term Lagging External
Retention, Non-financial Short term Lead & External
Loyalty, Non-financial Short term Lagging External
Satisfaction Non-financial Short term Lead & External
Lagging
Lead &
Lagging
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Lead &
Lagging

Business Process Cost, Financial Short term Lead & Internal


Productivity, Non-financial Short term Lagging Internal
Cycle time, Non-financial Short term Lead & Internal
Quality Non-financial Short term Lagging Internal
Lead &
Lagging
Lead &
Lagging

Organizational Employee
Learning retention, Non-financial Long term Lead & Internal
Technology, Non-financial Long term Lagging Internal
Climate for Leading
action or Non-financial Long term Internal
Culture. Leading

Sample Generic Scorecard

Perspectives Goals Objectives Measurements


Customer Continuously improve Decrease lead time.* Average lead time.*
customer satisfaction. Increase on time Percentage of
delivery. deliveries on time.
Reduce customer Number of customer
complaints. complaints.
Internal Business Continuously improve Decrease cycle time** Average cycle time.**
business processes. Increase quality. Number of defects and
number of items
reworked.
Increase productivity. Average output per
employee.
Innovation & Continuously develop Increase sales of new Percentage of sales
Learning and deliver new products and services obtained from new
innovative products & products & services.
services. Reduce development Average time from
time. initial design to
production.
Financial Continuously improve Decrease costs. Average unit costs.
financial performance. Increase sales growth Growth rate in sales.
Increase market share Company's market
share.
Increase return on Return on investment.
investment.
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BALANCED SCORECARD USED BY DIFFERENT COMPANIES

Credit Card Company

Balanced Scorecard Example


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Generic Government Tier 1 Strategy Map


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Regional Airline Balanced Scorecard


Mission: Dedication to the highest quality of Customer Service delivered with a sense of
warmth, friendliness, individual pride, and Company Spirit.
Vision: Continue building on our unique position -- the only short haul, low-fare,
highfrequency, point-to-point carrier in America.
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Electric Utility, Inc. Balanced Scorecard Example


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ECI’s Balanced Score card

ECI 's Balanced Scorecard


Perspectives Questions Goals Measurements
Percent of sales from new
New products.
products.
On-time delivery as defined by
How do Responsive supply.
the customer.
Customer customers see
us? Share of key account's
Preferred supplier.
purchases.
Number of cooperative
Customer partnership.
engineering efforts.
Manufacturing geometry versus
Technology capability.
the competition.
Manufacturing excellence. Cycle time, Unit cost and Yield.
Internal What must we
business excel at? Silicon efficiency and
Design productivity.
Engineering efficiency.
Actual introduction schedule
New product introduction.
versus planned introduction.
Time to develop the next
Technology leadership.
generation.
Can we Manufacturing learning. Process time to maturity.
Innovation & continue to
learning improve & Percent of products that equal
Product focus.
create value? 80% of sales.
New product introduction versus
Time to market.
the competition.
Survive. Cash flow.
Quarterly sales growth and
How do we look Succeed.
Financial operating income by division.
to shareholders?
Increased market share and
Prosper.
Return on Equity.

United Methodist Publishing House Balanced Scorecard


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United Methodist Publishing House Balanced Scorecard


Perspective Goals Measurements
Increase in sales growth in relation
to target.
Produce revenues sufficient to Achieve corporate earnings
Financial  cover expenses and provide percentage in relation to target.
reserves for the future. Achieve ROI by each market
business unit (profit center) in
relation to target.
Maintain ability to attract and retain Customer satisfaction based on
customers. survey questionnaire.
Customer
On time product development and
Measures not specifically defined.
delivery.
Maintain an effective and efficient
Measure of error rates on shipments.
distribution system.
Produce high quality, cost effective
Internal Process Measures not specifically defined.
products.
Maintain internal process
Measures not specifically defined.
effectiveness.
Maintain infrastructure needed for Measures related to success in
long-term growth and producing new products, projects
Organization improvement. and services.
Innovation 
Maintain staff competence. Measures not specifically defined.
and Learning
Goals related to learning - not Measures of learning not specifically
specifically stated. defined.

SOA BALANCED SCORE CARD


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Financial Perspective

Financial perspective concerns itself with increasing the ROI for the organization. SOA
Financial Perspective consists of objectives that SOA needs to achieve to be financially
successful. These are explained below

Change The revenue for any organization can be increased by increasing the markets
Channel to which its products can be exposed to diversified market. Customers utilize
Mix to channels as conduits to access the services of the organization. Multiplying
Increase these conduits increases the ability to access to these services
Revenue

Reduce Every product offered by an organization typically has a cost structure


Cost associated with it. This objective is about understanding that structure and
reducing the overall cost of the product

Reduce There is a cash-to-cash cycle for any organization. This is the time between
Operatin the account payable to account receivable. This objective deals with the
g Cost ability to reduce this time.
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Reduce The products that the organization supplies / sells will always have an actual
Risk demand and a forecasted demand. The gap between the actual and forecasted
demand causes organizations to lose money i.e. when there is more demand
than forecast, lost market and when there is more forecast than demand,
unused inventory. This objective is for reducing this gap

Definition for Objectives in Financial Objectives

Customer Perspective

SOA Customer perspective consists of objectives / value propositions that need to be


provided to its customers to achieve the financial perspectives.

Customer Segments for SOA Customer Perspective:

External External Partners are vendors who are integrated into the organizations
Business supply chain. This includes vendors who are connected to the enterprise as
Partners supply's supply or demand's demand. This category also includes
customers who are serviced indirectly through external business partners
(B2B2C)

Application Application developers who are responsible in terms of automating and


Developmen maintaining the applications through which the internal and external
t business partners interact

Compliance Audit teams which are interested in establishing policies so that the
Team organization is compliant with internal and external standards

Definition for Customer Segments

Value Propositions for SOA Customer Perspective:

Ease of Ability to integrate internally and externally with ease. Ease of integration
Integration can be characterized by lack of overhead in integration, ability to adopt to
/ Agility change / entropy (Agility) and minimal technology debt (low technology
issues).

Secured Appropriate security instrumented / implemented in transactions so as not to


with compromise the vendor or the data that is being transacted on. A non-
Guarantee intrusive yet appropriate implementation is directly proportional to ease of
of No Risk integration
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Standards Conformance to industry standards in integration and interaction to have


Based better synergies. Having a standards based integration helps in other value
propositions by utilizing industry knowledge and industry adoption of
standards thereby benefiting from standards maturity

Consistent Provide consistent data/ information to all partners. This can be


Data characterized through a clearly established source of record for the
information being transacted, ensured synchronization for data based on
perceived value of staleness and a well established master data management
strategy

Pervasive This value proposition describes the capability to extend the information
Informatio access across multiple channels, multiple semantic formats, multiple data
n Access protocols across multiple partners thereby ensuring the end customers get
access to it wherever they need it

Definition for Objectives in Customer Objectives

Process Perspective

SOA Process Perspective is divided into 3 types of processes and groups the process
execution along the lines of these three types

Innovation

These are the processes in SOA that create innovation in the enterprise. Innovation primarily
leads to change in other processes mostly for the betterment

Technolog Processes through which new technologies are onboarded into the
y Selection enterprise. This process has to be cognizant of the partner capability to
Process ensure the greater goal of best strategy as opposed to the tactical goal of best
practices only while balancing it with the aspect of being standards based.

Best Process through the standards are created, adopted, governed and executed
Practices in the enterprise. This plays a key role in establishing the standards based
and value proposition
Standards
Adoption

Definition for Objectives in Innovation Processes


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Operational

Operational processes are the activities through the customer value propositions are
facilitated. These processes are described below.

Service The development lifecycle through which the service is developed in


Development the organization. The execution and governance of this process has
impact in terms of realizing reuse in the organization

Service The process through the security is instrumented and implemented in


Security the transaction pipeline for the service.

Business Development for business processes is different from the development


Process of services. This is because the latter is a customization of business
Management logic while the former is a configuration done through declarative
paradigms and realized through technology standards such as BPEL,
BPMN.

Semantic Applications typically utilize business entities / concepts as structures


Interoperabilit for stationary data and for data in transit between applications during
y integration. Standardizing the business entity structures helps in moving
from a point to point application interfaces to a reusable service
endpoint where additional consumers can be integrated with minimal
service refactoring.

Definition for Objectives in Operational Processes

Support and Regulatory

These are governance processes that ensure that the objectives are being achieved in a
rightful manner. These governance processes could be internal governance processes to
conform to internal organizational policies or they could be external such as PCI, PII,
HIPAA, etc.

Service Process for managing the lifecycle for service provider and service
Governanc consumers. As service providers move to newer versions of service
e endpoint due to functional or non-functional requirements, the consumers
should be migrated appropriately so as to up the QoS. Service governance
also ensures that the technology and security standards are followed by the
service implementation and service consumption

Complianc There are typically two aspects to compliance and audit function i.e. the
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e and Audit policy / design time aspect and the runtime aspect. This process is to
facilitate the ability to design these policies for internal and external
compliance and instrumentation of the transaction pipeline to conform to
the policy guidelines

Definition for Objectives in Compliance Processes

Learning and Growth Perspective

This perspective highlights the objectives that need to be achieved to facilitate the process
perspective. These are described below

Training Training the enterprise to embark on the SOA program. This includes
establishing change management processes to raise SOA awareness across
the enterprise and identifying and addressing large knowledge gaps to
facilitate voluntary compliance to the SOA Program.

Core Group Training the core participants of the process perspective to ensure that the
Skilling process can be executed efficiently.

Standard Participating in standard bodies to be well integrated with the industry

Participation to ensure the appropriate standards are being adopted by the enterprise.
and This objective also involves the aspect of contributing back to the
Contribution community to help the industry. The standards can range from horizontal /
business agnostic standards to vertical / business specific standards.

Collaboratio Establishing appropriate collaboration avenues to ensure internal partners


n benefit from each others knowledgebase. The collaboration may also be
seen as a portal for creating new ideas that will improve process
efficiencies and providing better value propositions

Definition for Objectives in Learning and Growth


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HOW BALANCED SCORE CARD CREATES VALUE IN AN ORGANISATION

 The Balanced Scorecard transforms an organization into a knowledge driven


organization.
 It improves the company’s processes, motivate and educate employees, and enhance
the information systems, while monitoring the project’s progress toward the
organization’s strategic goals.
 It helps in focussing the whole organisation on the few key things needed to create
breakthrough performance.
 Helps to integrate various breakthrough programs. Such as quality, reengineering, and
customer service initiatives.
 Breaking down strategic measures towards lower levels, so that unit managers,
operators and employees can see what is required at their level to achieve excellent
overall performance.
 Balanced score card helps the strategies to be communicated throughout the entire
organization in a very precise and specific metric format. This allows people to easily
identify with the strategies of the organization.
 Balanced score card links everything together, working from the same plan as
opposed to scattered pockets of knowledge working in all directions.
 When you embed everyone into one system, the organization can respond quickly to
changes in the marketplace.
 It aligns Customer Priorities & Business Priorities
 It has the Ability to Track Progress Over Time
 Balanced score card evaluates Process Changes
 It translates strategy into more easily understood operational metrics and goals;
 It aligns organizations around a single, coherent strategy;
 It helps in making strategy everyone’s everyday job, from CEO to the entry-level
employee;
 Balanced score card makes strategic improvement a continual process
 Balanced score card helps in identifying Opportunities for Initiatives & Partnerships
 It helps in Developing Action Plans & Setting Strategic Direction
 Since strategy is everyone's business, you have a tool for communicating strategy in
terms that people can relate to.
 Balanced Scorecards unlock and release many of the solutions that people have for
meeting strategic goals and objectives. This is why Balanced Scorecards are so
powerful in helping an organization create higher values.

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