Corporate Performance Management & Impact of Balanced Scorecard System

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1 Corporate Performance Management & Impact of Balanced Scorecard System Research Paper: RP-ECBPM/0029 By Ahmed Bin Muhammad Copyright Copyright Page 1

2 1.0 History of Corporate Performance Management Research Paper: RP ECBPM/0029 The world of business has undergone a revolution in the latter half of this century, namely: Growing globalisation and increased market (global) competition. Customer concerns moving towards price, quality and service standards. Product life cycles are ever shortening. Continuous improvement of processes and innovation. Development of new methods of control that can deal with intangibles. Furthermore, according to Kaplan & Norton (1996), there have also been certain changes in the market situation, namely: 1. Shift of Industrial age competition to information age competition. 2. During the industrial age ( ), companies succeeded by how well they could capture benefits from economies of scale and scope. 3. Financial systems i.e. those developed by General Motors, Dupont, Matsushita, were to facilitate and monitor efficient allocations of financial and physical capital. In the industrial age, corporate performance measurement and management was linked more to financial aspects of an organisation, thus, major emphasis was placed over only one aspect and non-financial aspects were totally ignored. Cost accounting management techniques were very common in the USA; budget systems were in widespread use in the 1920s; responsibility accounting was used by Sloan at General Motors in the 1930 s; and summary measures such as Return on Capital Employed were regularly used at Dupont before World War II to measure performance of its desperate businesses. Further, most performance measures were derived from cost accounting information and management decisions tended to be based on such information. Cost Accounting information is, however, more relevant to low technology and high labour content (which is not the case of modern businesses) and therefore, is unable to map process performance. In the period of 1970 s and 1980 s, management theory held that organisations should optimise at business unit level to increase shareholder value and thus the major emphasis should be placed on measuring and managing financial performance indicators and tangible assets. Moreover, financial based performance metrics are largely one-dimensional in that they focused only on the tangible aspects of the business. Kaplan & Norton (1996) argue that the emergence of the information era, in the last decades of the 20 th century made obsolete many of the fundamental assumptions of the industrial age competition. According to them, no longer can companies now gain sustainable competitive advantage by merely deploying new technology rapidly into physical assets and excellent management of financial assets and liabilities. Thus, Copyright Page 2

3 implying the notion that non-financial measures and intangible assets are equally important as financial measures and tangible assets in today s changing market environment. Stage 1 Systems Stage 2 Systems Stage 3 Systems Stage 4 Systems System aspects Start-up comps L t Companies in 21 st C t Data Quality - Many errors - No surprise - Shared - Fully linked - Large variances - Meets audit databases database and standards - Stand-alone systems systems - Informal linkages External Financial - Financial reporting -Inadequate -Tailored to - Stage 2 system systems Reporting financial maintained reporting needs Product/customer -Inadequate - Inaccurate - Several stand Costs - Integrated ABM - Hidden costs & alone activity systems profits based costing systems Operational and - Operational and Strategic strategic Control performance measurement systems i.e. BSC - Inadequate - Limited feedback - Several stand alone performance measurement systems [Figure 1: Source: Evans, H. et al (1996), Who Needs Performance Management? Management Accounting, 20-34] Developing an information rich approach to management will obviously require significant systems support (Evans, H. et al 1996). Moreover Kaplan believes that today s systems are largely inadequate to meet the need for fully integrated reporting; the development path is clear. His vision of how information systems are developing is shown in figure 1. He believes that the new approach of management reporting and control Copyright Page 3

4 systems will be fully integrated, with a common set of information i.e. entered once and accessible to all, thus supporting both internal and external reporting. Hugh Evans et al (1996) state that traditionally, management accountants have provided financial results, which aim to gauge the health of the business. Over the years these results have become short-term in perspective, such as month-on-month profitability, and narrow in scope, e.g. return on capital employed. This narrow, short-term focus has become real problem for both managers and investors; therefore, such performance measures and management techniques/strategies that have more predictive power and are result oriented with a long-term perspective are needed. Furthermore, they argue that companies must adopt a more enlightened approach to assessing and managing company performance. If they do not, they will have increasing difficulty in coping with the challenges they face and achieving the goals they set themselves. If they do, they will be starting to focus on what is really important, be able to manage resources more effectively and measure and control progress towards their goals. This will help create the capability for a performance enhancing and continuous-improvement culture to flourish. Research, however, shows that senior executives have now realised that no single measure can provide a clear performance target or focus attention on the critical areas of the business, because traditional costing systems were never designed to measure activities that add value to the business. They have, therefore, changed focus of their attention from only financial indicators to a balanced view over non-financial indicators as well, through performance measurement and management systems. 2.0 Why Does A Business Need A Performance Measurement & Management System? Measurement matters; if you can t measure it, you can t manage it. An organisation s measurement system strongly affects the behaviour of people both inside and outside the organisation. If companies are to survive and prosper in information age competition, they must use measurement and management systems derived from their strategies and capabilities (Kaplan, R.S. et al, 1996b) Strategic planning and performance measurement & management in this age of information and knowledge has become crucial for coordination by ensuring consistency of decision making throughout the organisation. Performance measurement systems have always played an important role in effective planning and efficient running of a business. By measuring performance in a constructive way, some profound Copyright Page 4

5 improvements can be made to overall performance of an organisation. Brotherton et al (1998) argues that an effective measurement system enables the managers of an organisation to determine if the activities occurring within a facility are, in fact, supporting the achievement of objectives, and whether these objectives move the organisation closer to the stated vision. The information age environment for both manufacturing and service organisations requires new capabilities for competitive success. The ability of a company to mobilise and exploit its tangible or invisible assets has become far more decisive than investing and managing physical, tangible assets (Kaplan & Norton, 1996). Kaplan & Norton (1993), characterise performance measurement systems as an essential part of company strategy. Further, they explain that executives may introduce new strategies and innovate operating processes intended to achieve breakthrough performance, then continue to use the same short-term financial indicators they have used for decades, measures like ROI, sales growth, and operating income. Effective measurement, in their opinion, must be an integral part of the management process. Although performance measurement systems can play a key role in communicating, evaluating and rewarding the achievement of strategic objectives, research has found that many managers feel that their existing measurement systems do not adequately fulfil these functions. According to Meyer 1 (1997), a survey conducted by the Institute of Management Accounts (IMA) in 1996 found that only 15% of the respondent s measurement systems supported top management s business objectives very well, while 43 percent were less than adequate or poor. However, the fact remains that optimising and managing organisational performance across the enterprise is critical to the success of every business. The challenge has been that most companies have not understood the significant level of commitment required to accomplish this mission while dedicating the level of required resources (Smith, M. A. 2001). 2.1 Performance Measurement in Relation to TQM Rusk (1997) argues that traditionally managers used internally generated performance measures, which told them about the company s effectiveness, efficiency and productivity. According to him such an introspective view is inconsistent with the Total Quality approach mainly due to the fact that: It presumes to know what customers think about products and services. It implies a control culture where staff cannot be trusted and productivity has to be squeezed out of them. 1 Meyer, M. W. (Nov 1997) Performance, Compensation, And the Balanced Scorecard Copyright Page 5

6 In Rusk s opinion, companies should, therefore, move towards a TQM approach to measuring and managing performance, which should involve measuring not just for control but also for improvement, thus, subsequently leading to benchmarking their achievements. It is, therefore, important to balance short-term operational successes with the long-term financial health of the company; non-financial indicators are better barometers of long-term, future corporate health than financial results, which relate to past activity. Zairi (1992a) suggests that TQM-based performance measures are required for the following reasons: You can t manage what you can t measure; To determine what to pay attention to and improve; To provide a scoreboard for people to monitor their own performance levels; To give an indication of the cost of poor quality; To give an indication of the cost of poor quality; To give standard for making comparisons; and To comply with business objectives. Moreover, the measurement of performance in TQM must be related to the process. In the past, however, firms have sought to simplify performance measures by adopting multiunit organizational designs, decentralizing operational decisions to individual business units, and holding business units accountable mainly for bottom-line financial results (Meyer, M. et al. 1997). According to Kaplan (1992), executives also understand that traditional financial accounting measures like ROI and EPS 2 can give misleading signals for continuous improvement and innovation-activities that today s competitive environment demands. The traditional financial measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today. However, the issues are not confined to measuring the organisational performance only, but also to long-term planning and successful implementation & operation of a company strategy. Furthermore, efficient management of key performance indicators (KPIs) is extremely important for efficient and successful business operation because the purpose of any performance measurement & control system is to convey information and using the right performance metrics, managers can use the system not only to monitor performance, but also communicate the company strategies and expectations throughout the organisation. Moreover, these systems focus on data-financial and non-financial information that influences decision making and managerial action (Simons, R.2000). 2 Return On Investment (ROI) Earnings Per Share (EPS) Copyright Page 6

7 2.2 Benefits of Performance Management Approach Benefits to companies from using performance management approaches Car Global bank Component Telephone Manufacturer Manufacturing Utility Business Issues Declining sales and loss forced Competitive pressures Customer requirements Fast growing customer base fundamental required for high quality required radical reappraisal of customer and price re-organisation manufacturing service competition to ensure & sales. improvements forced major continued and further redesign of customer focus. automation business. Approaches Adopted - Process measures introduced to support goals and manage improvement. - Teamwork cells replaced manufacturing hierarchies - Tracking of car owners produced extensive feedback and customer interaction for product development. - Employees empowered to resolve problems and improve - End-to-end cross functional teams use ongoing customer satisfaction measures to drive improvement. - Skills training driven by clients requirements and rewarded. - Executive information system communicates balanced requirements and bestpractice - Business change teams led from the top with process management skill development. - Multi-skilled teams provide business performance focus throughout the company. -Training in improvement tools and skills certification to maintain motivation and reward - Strategic measures drive balanced performance reviews. - Moved from functionally driven to process driven organisation - Empowered teams provide customer focus supported with extensive training. - Activitybased costing data used to assess customers, products and Copyright Page 7

8 processes indicators. achievement. initiatives. - High - Long and - Ownership - Emphasis on emphasis on short term and pride learning and skills planning established with development development integrated with demarcation with no blame and training. competitive and eliminated and culture. functional focus on benchmarks. customers. Benefits Breakeven volume reduced Client enquiry time halved Almost 50% sales increase Continued profitable sales by 50% and with reduced over three years growth continuing operating costs whilst achieving underpinning volume and 24-hr 25% headcount expanded increase. processing. reduction. employment opportunities. [Figure 2: Source: Evans, H. et al (1996), Who Needs Performance Management? Management Accounting, 20-34] According to Gentia (1998), organisations have now come to realise the importance of an enterprise strategic feedback and performance measurement & management application that enables them to more effectively drive and manage their business operations. Moreover, no longer can organisations simply monitor and track key financial performance indicators that have often been historical in nature. While these remain critical, Gentia argues, what has become apparent to many organisations is the need to more effectively track and manage performance in other key areas of their business i.e. areas that all contribute to future financial results. Copyright Page 8

9 As shown in table 2, companies from different sectors have experienced various benefits by successfully implementing the performance measurement & management systems. Further, a good performance measurement system, according to Bourne et al (2000), helps an organisation to: Establish its current position how it is currently performing. Communicate direction show its people where it wants to go. Stimulate action help identify when things need to be done. Facilitate learning help the organisation understand, how its business works. Influence behaviour encourage the right activity. Moreover, he argues that on the downside, a badly constructed performance measurement system will destroy performance by encouraging emphasis on the wrong activities and the lack of harmony between the organisational strategies, management and overall organisational culture. 2.3 Which Performance Management Approach to Choose? As companies around the world transform themselves for competition that is based on information, their ability to exploit tangible assets has become far more decisive than their ability to invest in and manage physical assets (Kaplan & Norton, 1996). Managers and senior executives therefore look for such strategic management techniques that provide a balanced view of the critical areas of business. The cornerstone of an organisation s performance measurement/management systems, according to Gupta (1999), should be the company s vision and mission statement. Whereby, the former indicating the organisation s reason for existence and the latter indicating the company s planning and path towards the achievement of its objective. Bourne et al (2000), indicates that a good performance measurement system should include: A balance of financial and non-financial measures. A balance of past achievement measures and those that help to predict the future. Measures that communicate strategic direction goals. A mechanism for raising awareness and stimulating action. A mechanism for learning, from the information the measures provide. Copyright Page 9

10 [Fig 3: Attributes Of World-Class Performance Measurement Systems] Research Paper: RP ECBPM/0029 Track Customer-Driven Success Factors Throughout The Business Promote Continuous Improvement In All Processes Represent A System Of Inter-Linked Measures Help Cross-Function Integration Give Feedback On Gaps Between Best-In-Class And Own Performance Moreover, world-class performance measurement systems (see figure3) are characterised by certain critical elements; therefore, looking at measures that have a broader view over critical operational measures, in addition to traditional financial measures. According to Kaplan & Norton (1996), as organisations attempt to transform themselves to compete successfully in the future, they are turning to a variety of improvement initiatives: Total Quality Management (TQM) Just-In-Time (JIT) production and distribution systems. Time-based competition. Lean production/lean enterprise. Building customer-focused organisations Activity-based cost management Employee empowerment Re-engineering. They argue that although each of these improvement programs has demonstrated success, but their goal is not incremental improvement or survival, and many of these improvement programs have yielded disappointing results. Moreover, these programmes are often fragmented and may not be linked to the organisation s strategy nor to achieving specific financial and economic outcomes. According to Kaplan & Norton, breakthroughs in performance require major change, and that includes changes in the measurement and management systems used by an organisation. Copyright Page 10

11 Gupta (1999) argues that there is an inherent relationship between formulating strategic goals and identifying the KSFs for any organisation; also, an evaluation of organisational effectiveness must include an evaluation of relative performance compared to that of competitors. Moreover, if an integrated measure is too difficult to construct, attention is often diverted to quantifiable metrics simply to overcome measurement problems. Senior executives, according to Kaplan & Norton, have realised that no single measure can provide a clear performance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures. The collision between the irresistible force to build long-range competitive capabilities and the immovable object of the historical-cost financial accounting model has created a new synthesis: the Balanced Scorecard (BSC), (Kaplan & Norton, 1996). The introduction of BSC, as a strategic tool to measuring and managing company performance, was a result of a yearlong research carried by Kaplan & Norton. It complements traditional financial indicators with measures of performance for customers, internal processes, and innovation and improvement activities. 3.0 The evolution/origin and development of Balanced Scorecard The origins of Balanced Scorecard can be traced back to 1990, when the Nolan Norton Institute, the research arm of KPMG, sponsored a one-year multi-company study, Measuring Performance in the Organisations of the Future. The study, according to Kaplan & Norton (1996), was motivated by a belief that existing performance measurement approaches, primarily relying on financial accounting measures were becoming obsolete. Following from the article, The Balanced Scorecard Measures That Drive Performance, published in 1992, whereby Kaplan & Norton summarised results of their study, Balanced Scorecard as a strategic management technique has gained much popularity amongst the managers, since it has given corporate management a structured approach to measuring and managing business performance in four key areas, namely: customers, financials, internal processes, and organisational learning & Improvement. Research has shown that a growing number of firms are replacing their financial performance measurement and compensation systems with BSC incorporating multiple financial and non-financial indicators. 3.1 The Balanced Scorecard The Balanced Scorecard (BSC) is a strategic tool that enables companies to link a set of indicators directly with their strategy, and allows them to track all the factors associated with corporate performance. Although Copyright Page 11

12 BSC has been extremely successful in the US, but it is not unique. Its take up mirrors the success of an older French management control tool called the Tableaux De Bord best translated as performance scorecard (Mendoza, C. et al 2001). According to Kaplan & Norton (1996a), companies are in the midst of revolutionary transformation. Moreover, the scorecard technique recognises that companies need measures, which view the organisation from a variety of standpoints including e.g. the needs for stakeholders. Proponents of BSC concept contend that this approach provides powerful means for translating a firm s vision and strategy into a tool that effectively communicates strategic intent and motivates performance against established strategic goals. Debby Young 3 (1998), defines BSC as: A tool for communicating corporate goals to the front line workers who are responsible for reaching them. It balances traditional financial measures such as net income ad ROI, with operational measures customer satisfaction, internal business processes and an organisation s ability to innovate and learn. The scorecard lists goals and then measures and records whether the business is reaching them. The goals are broken down into measurable metrics built from data collected throughout the business To succeed financially, how should we appear to our shareholders? Financial Objectives Measures Targets Initiatives To achieve our vision, how should we appear to our customers? Customer Vision & Strategy Objectives Measures Targets Initiatives To satisfy our shareholders and customers, what business processes must we excel at? Internal Business Perspective Objectives Measures Targets Initiatives To achieve our vision, how will we sustain our ability to change & improve? Learning & Growth Objectives Measures Targets Initiatives [Fig 4: Source: Kaplan, R.S. et al (1996a) Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 76.] 3 Young, D. (Nov. 1998) Score It A Hit, CIO Enterprise Magazine Copyright Page 12

13 In contrast to traditional financially based measurement systems, the BSC solidifies an organisation s focus on future success by setting objectives and measuring performance from distinct perspectives and provides an interconnected model in four key areas: financial, customer, internal business process and learning and growth, measurements for each of these perspectives are linked together in a chain of cause and effect that recognises that the long-run goal for the business is to generate financial returns to investors. Since the four perspectives are equally important in the long run, they should be balanced against each other; that is no one perspective should be allowed to predominate over the other (Kald, M. et al 2000). BSC translates vision and strategy into a tool that effectively communicates strategic intent and motivates and tracks performance against established goals (Renaissance, 2001). Vision describes the ultimate goal to be achieved, and strategy, on the other hand, is a shared understanding about how that goal is to be reached, therefore, defines path towards its achievement. 3.2 Balanced Scorecard As A Performance Management System In addition to communicating corporate strategies throughout the organisation, BSC has become the core management system for many corporations. Managers use it to set individual and team goals, allocate resources, compensate employees and plan budgets (Young, D. 1998). Moreover, it also provides feedback on an ongoing basis as to how individuals, departments and business units are performing in each of the areas the leadership has selected as critical to the company s success. Evans et al (1996), argues that the scorecard provides cornerstone of a strategic management system as company managers are forced to clarify their thinking by reviewing the simultaneous impact of their actions from each of these perspectives and one of the key benefits of the approach is its ability to identify strategic conflicts and to communicate strategy within the organisation. The real power of BSC, according to Kaplan & Norton (1996), occurs when it is transformed from a measurement system to a management system. They argue that as more and more companies work with the BSC, managers and senior executives see how it can be used to: Clarify and gain consensus about strategy, Communicate strategy throughout the organisation, Align departmental and personal goals to the strategy, Link strategic objectives to long-term targets and manual budgets, Identify and align strategic initiatives, Perform periodic and systematic strategic reviews, and Obtain feedback to learn about and improve strategy. Copyright Page 13

14 Clarifying And Translating The Vision & Strategy - Clarifying the vision - Gaining consensus Communicating & Linking - Communicating & Educating - Setting Goals - Linking rewards to Balanced Scorecard Strategic Feedback & Learning - Articulating the shared vision - Supplying strategic feedback - Facilitating Strategy review & learning Planning & Target Setting - Setting targets - Aligning strategic initiatives - Allocating resources - Establishing milestones [Fig 5. Source: Kaplan, R.S. et al (1996a) Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 77] Effective measurement, however, must be an integral part of the management process. Moreover, much more than a measurement exercise, BSC as a management system can motivate breakthrough improvement in such critical areas; product, process, customer, and market development (Kaplan, R.S. et al, 1993). However, it should translate a business unit s mission and strategy into tangible objectives and measures. Measures will represent a balance between external measures for shareholders and customers and internal measures of critical business processes, innovation, and learning & growth (Kaplan, R.S. et al, 1996b). Kaplan & Norton argue that BSC is more than a tactical or an operational measurement system. Innovative companies are using it as a strategic management system to manage their strategy in the long run. As per figure 6, they are using it to accomplish critical management processes: 1. Clarify and translate vision and strategy 2. Communicate and link strategic objectives and measures 3. Plan, set targets, and align strategic initiatives 4. Enhance strategic feedback and learning Copyright Page 14

15 However, mere implementation of BSC as a strategic management cannot lead to success. A thorough understanding of the system is very important; otherwise results will be negative, As shown in table 1 (see appendix), according to Larcker et al (1997), 25% of the respondents to the Towers Perrin (1996) survey experienced problems or major problems with the extra and expense required to implement and operate the balanced scorecard, and 44% encountered problems developing the extensive information systems needed to support the scorecard approach. Moreover, the use of a large number of performance measures may also cause managers to spread their efforts over too many objectives, reducing the effectiveness of the incentive plan. More than 40% of the Towers Perrin survey respondents Attributes for supporting balanced scorecard stated that the large number of measures in the BSC diluted management model. the overall impact of the new measurement systems. Gentia Balanced Scorecard framework (1998) lays out certain attributes that BSC, as a management model must carry (see figure 6). Therefore, linking the overall BSC framework with management process and moving towards strategic feedback and learning. Malina et al (2001) argue that BSC as a management technique should have the following characteristics, in order to attain strategic alignment: A comprehensive but passionate set of measure of critical performance variables. Critical performance measures casually linked to valued outcomes. Effective accurate, objective and verifiable performance measures. Furthermore, in order to further promote effective motivation BSC should have: Strategic objective based. Vision statements. Cascades and connects multiple scorecards. Strategic themes. Links objectives, measures, and initiatives. Comparison of measures to targets. Management Process Subjective indicator reporting. Subjective written assessments. Scorecard management discipline i.e. individualised reminders for necessary input. Initiative management. Cascades to individuals goals/performance. Accountability. Strategic feedback and learning Performance at a glance. Reporting on measures of four perspectives. Support for communication/commentary. Linkage view with performance Performance measures that reflect manager s controllable actions and or relative performance. Performance targets or appropriate benchmarks that are challenging but attainable. Copyright Page 15

16 Performance measures that are related to meaningful rewards. The perspectives as defined by BSC go through a series of cause and effect relationships among employee satisfaction, customer satisfaction, customer loyalty, market share and eventually financial performance. Thus, making the management clear, the results of measures taken for the achievement of corporate objectives and possible expected results. BSC as a management tool will, therefore, look at processes from four perspectives as: Financial success in achieving corporate mission i.e. return on investment and economic value added Customer success in service, satisfaction, retention and long-term value creation Internal Business Processes success in organisational development i.e. quality, response time, cost and product innovation Learning and growth consistent with vision and business strategy i.e. through employee satisfaction/empowerment and information systems The financial perspective, however, should serve as the last link in the chain, thus, describing performance with traditional financial accounting measures of profitability, asset returns, and revenue growth that are expected to relate directly to the shareholder s return on investment. 3.3 The Four Perspectives Originally, the BSC design identified a balanced view over company performance measurement and management using four perspectives: Customer Externally focused Financial measures Internal Business Process Internally focused Learning and Growth measures Customer Perspective The customer perspective views the firm from the standpoint of the customer. BSC customer measures describe the extent to which the firm is meeting its customer s needs. It addresses Copyright Page 16

17 objectives and measures with respect to market share, customer satisfaction, new customer acquisition, customer retention, long-term value creation and customer segment profitability. Customers are of course, the source of firm s revenues and their dealings are the reason for the business to exist i.e. the ultimate buyer. Long-term financial success therefore depends upon the firm s ability to create and deliver products and services that are valued by customers. Market Share Customer Acquisition Customer Profitability Customer Retention Customer Satisfaction [Fig 7: The customer perspective-core measures (Source: Kaplan, R.S. et al (1996) The Balanced Scorecard: Translating Strategy Into Action ] Market Reflects the proportion of business in a given market (in terms of number of Share customers, dollars spent, or unit volume sold) that a business unit sells Customer Measures, in absolute or relative terms, the rate at which a business unit Acquisitio attracts or wins new customers or business n Customer Tracks, in absolute or relative terms, the rate at which a business unit retains or Retention maintains ongoing relationships with its customers Customer Assesses the satisfaction level of customers along specific performance criteria Satisfactio within the value proposition n Customer Measures the net profit of a customer, or a segment, after allowing for the Profitabilit unique expenses required to support that customer y [Fig 8: The customer perspective-core measures (Source: Kaplan, R.S. et al (1996) The Balanced Scorecard: Translating Strategy Into Action ] According to Kaplan & Norton (1992), customer concerns tend to fall into four categories: time, quality, performance, service and cost. Moreover, BSC emphasises the link between the firm s products and Copyright Page 17

18 satisfaction of its customers with those products, i.e. the value proposition 4 that the firm delivers to its customers. The core of any business strategy is the customer value proposition (see fig. 9), which describes the unique mix of product, price, service, relationship, and image that a company offers. It defines how the organisation differentiates itself from the competitors to attract, retain and deepen relationships with targeted customers. The value proposition is crucial because it helps an organisation connect its internal processes to improved outcomes with its customers (Kaplan, R.S. et al 2001). In past, however, major emphasis was given to customer Generic Model Valu Product Service = + + Functionality Quality Price Time [Fig 9: The customer value proposition (Source: Kaplan, R.S. et al (1996) The Balanced Scorecard: Translating Strategy Into Action ] profitability i.e. maximum sales/return, thus other elements of core measures that revolve around customer orientation were totally ignored. Therefore, the centre of their activities revolved around profit maximisation and not value creation. Kaplan & Norton (1996a) argue that the value proposition is the key concept for understanding the drivers of the core measurements of satisfaction, acquisition, retention and market & account share. Moreover, to put the BSC to work, companies should articulate goals for CSFs and then translate these goals into specific measures and corporate strategy. But, in order to Critical Success Factors [Fig. 10] 1. Customer Orientation 2. Customer based organisational culture 3. Long-Term-Value creation 4. Customer Relationship Management 5. Customer Service Improvement formulate customer perspective it is critical for managers to 6. Time have a clear idea of their targeted customer and business 7. Quality segments and selected a set of core outcome measurements. 8. Price Corporate strategies, in order to achieve goals, have to be communicated throughout the organisation otherwise employees will not know the progress with respect to customer satisfaction or retention, until its too late. Therefore, by selecting specific objectives and measures across these three classes, managers can focus their organisation on delivering superior value to targeted customer segments, thus leading to overall corporate performance management under this perspective. 4 Value propositions are the attributes of the product or service that drive customer satisfaction. Copyright Page 18

19 3.3.2 Financial Perspective The BSC does not ignore the traditional financial perspective that represents the long-term objectives of the company, as it explicitly focuses on linkages among business decisions and outcome intended to guide strategy development, implementation and communication. The measures chosen under this perspective will, therefore, represent the relevant stage in the product or service life cycle and are summarised by Kaplan & Norton (1996a) as rapid growth, sustain and harvest (see fig. 11), as the argument remains that financial objectives can differ considerably at each stage of a business s life cycle. Growth businesses are the ones at early stages of their life cycle. They have significant potential of expansion in the products and services in their market segment. On the other end, majority of the businesses will be found in the sustain stage, showing high potential in their market segment, thus attract investment and re-investment to earn excellent returns on such investment. Some of the businesses will be in the maturity/harvest stage of their life cycle, thus, requiring no more investment for expansion but what is required to maintain their activities. The generic model (fig. 11), therefore, identifies the strategic themes at different business life cycles with respect to revenue growth & mix, cost reduction & productivity improvement, and asset utilisation that can be used as a business unit financial strategy. Measuring Strategic Financial Themes Strategic Themes Business Unit Strategy Growth Revenue Growth & Mix - Sales growth rate by segment percentage revenue from new product, services and Cost Reduction/Product ivity Improvement Revenue/Employee Asset Utilization - Investment (% of sales) - R&D (%of customers sales) Copyright Page 19

20 Sustain - Share of targeted customers and accounts - Cross-selling - Percentage revenues from new applications - Customer and product line profitability - Cost versus competitors - Cost reduction rates - Indirect expenses (% of Sales - Working capital ratios (cash-to cashcycle) -- ROCE by key asset categories Asset utilization rates Harvest - Customer and product line profitability - Percentage unprofitable customers - Unit costs (per unit of output, per transaction) - Payback - Throughput [Fig. 11: Source: Kaplan, R.S. et al (1996) The Balanced Scorecard: Translating Strategy Into Action ] Financial performance measures, according to Kaplan & Norton (1992), indicate whether the company s strategy, implementation and execution are contributing to bottom-line improvement. Moreover, some critics argue that the terms of competition have now changed and that traditional financial measures do not improve customer satisfaction, quality, cycle time, and employee motivation. In their view financial performance is the result of operational actions, and financial success should be the logical consequence of doing the fundamentals well. Critical Success Factors [Fig. 12] - Return On Capital Employed - Shareholder Value Creation - Cash Flows i.e. debtor/creditor/inventory management etc. - Sales Backlog - Operating Income/Project Profitability - Direct/Indirect Cost Reduction - Tangible/Intangible Asset Utilisation/monitoring Effect/Goal Cause/Measures However, the issues are not merely confined to performance measurement only, because management of financial performance indicators is even more critical than measurement itself. Strategic management of cause CSFs (fig. 12) is likely to result in effect i.e. ROCE and Shareholder value creation, which is, however, the ultimate motive of any business; maximise the returns and value of the capital of its investors, Copyright Page 20