The Balanced Scorecard as performance measurement and personal development tool in a steel organisation

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1 The Balanced Scorecard as perormance measurement and personal development tool in a steel oranisation Andre van Staden Student number B Enineerin (Electrical and Electronic) Mini Dissertation in partial Fulillment o the Requirements or the Deree MASTER IN BUSINESS ADMINISTRATION in the FACULTY OF ECONOMICS AND MANAGEMENT SCIENCE at the NORTH WEST UNIVERSITY, VANDERBIJLPARK CAMPUS Study leader: Pro. Anet Smit Vanderbijlpark 009

2 ACKNOWLEDGEMENTS The ollowin deserve my sincere ratitude. My Lord, who have blessed me with such race. My wie Bernadene, my sons Jonathan and Daryll who have been so patient and supportive durin my study years. The people workin in my own department within ArcelorMittal who did my work durin times when I had to take study leave or write exams. My ellow MBA study roup members (Jenny, Nanette, Peter, Nic and Clinton) who have throuhout the years been a strenth o support, trust and encouraement. Proessor Anet Smit or her leadership, support and uidance. The Manaement at ArcelorMittal, Vanderbijlpark Works, or allowin me to do my MBA and to do this research within the company. The HR department in ArcelorMittal, Vanderbijlpark Works, or assistin with the ield work to collect the research data. The various unions and ellow workers at ArcelorMittal, Vanderbijlpark Works, or their assistance and motivation in the completion o the questionnaire. Everybody at the North West University who contributed towards my education durin the past years. Dr JC Huebsch or the proessional editin and prooreadin o this manuscript.

3 ABSTRACT The Balanced Scorecard (BSC) is a strateic manaement tool that provides the manaer with a clear and concise picture o the business's health and proress in reachin the oals o the business (Norton & Kaplan, 99: 7-79). The BSC is a set o inancial and non-inancial measures relatin to a company's critical success actors. O late the BSC was also used as a personal development tool - measurin the individual's perormance towards set personal rowth tarets. The BSC process has been part o ArcelorMittal, Vanderbijlpark Works or many years. This process can add reat value to a company i manaed eectively- the question is thus: is the BSC eectively implemented in ArcelorMittal, Vanderbijlpark Works? It was decided to conduct a study to determine the status o the BSC with one main objective and two secondary objectives, namely to - establish whether ArcelorMittal, Vanderbijlpark Works is eectively usin the BSC tool as a perormance measurement, and a personal development tool (main objective); determine i there is a dierence between the eective implementation o the BSC as a perormance manaement and personal development tool within the dierent business units within ArcelorMittal, Vanderbijlpark Works. These units are Iron Makin, Steel Makin, Rollin, Enineerin and Sta (Secondary objective ); and determine i there is a dierence between the eective implementation o the BSC as a perormance manaement and personal development tool between dierent role radins (these roles are deined as E, F and G roles) in ArcelorMittal, Vanderbijlpark Works (Secondary objective ). An empirical study was conducted in ArcelorMittal, Vanderbijlpark Works. A questionnaire was used as the measurin instrument and was issued via the HR Department to a taret roup o 7 employees. The questionnaires consisted o 5

4 questions divided into sections to test both the eectiveness o the BSC as a perormance manaement tool and a personal development tool. To analyse the data, descriptive statistics and requency distributions were used and calculated in Microsot PHStat. From these results the ollowin conclusions were drawn. The BSC process is well entrenched in ArcelorMittal, Vanderbijlpark Works, but lacks overall eectiveness; The BSC does encourae people to sel-develop, but development plans are lackin, not enouh time or trainin is iven and manaers must show a real intent to develop their people. From the study and the conclusions drawn, the ollowin recommendations were made. Address the issue o mistrust between the employees and their supervisory manaement. Manaers should make allowance or individuals to make mistakes. Encourae innovation in the oranisation. More eort should be applied to translate the company strateic objectives into workable (and measurable) KPI 's at the lower levels o the oranisation. ArcelorMittal should make a concerned eort to allow more time or trainin and sel-development durin normal workin hours. Revisit all KPI's or weiht allocation. All the departments and all the levels in the oranisation see this as a drawback o the BSC system. Test the applicability o the KPis. Ensure that the KPis on the BSC are clear and that these relect the eort the company requires orm the individual. Allow more participation o the individual durin the compilation o the BSC (this will improve buy-in). The E-role level communicates very well downwards to the lower levels in the oranisation. Take key learnin aspects rom this roup, and skill the F-role and G-role levels to the same extent.

5 ABBREVIATIONS BSC - Balanced Scorecard BU - Business Unit SAP - Systems Applications Products HR- Human Resources KPI- Key Perormance Indicator SHERQ- Saety, Health, Environment, Risk, Quality IT- Inormation Technoloy IM - Inormation Manaement

6 TABLE OF CONTENT CHAPTER : NATURE AND SCOPE OF STUDY. INTRODUCTION. PROBLEM STATEMENT. OBJECTIVES OF THE STUDY.. Primary objectives.. Secondary objectives. SCOPE OF THE STUDY.5 RESEARCH METHOD.5. Phase : Literature review.5. Phase : Empirical study Research desin Participants Measurin instrument Statistical analysis 6.6 LIMITATIONS AND ANTICIPATED PROBLEMS 6.7 LAYOUT OF THE STUDY 7.8 CHAPTER SUMMARY 7 CHAPTER : LITERATURE STUDY 9. INTRODUCTION 9. ORIGIN OF THE BALANCED SCORECARD 9. DEFINTIONS OF THE BALANCED SCORECARD 0. THE NEED FOR A BALANCED SCORECARD.5 THE BENEFITS OF A BALANCED SCORECARD.6 THE COMPONENTS OF A BALANCED SCORECARD.6. Financial perspective 5.6. Customer perspective 6.6. Internal-business-process perspective 7.6. Learnin and rowth perspective 8.7 POSSIBLE REASONS FOR FAILURE OR PROBLEMS WITH

7 THE BALANCED SCORECARD 9.8 EFFECTIVENESS OF MEASUREMENT AND THE BALANCED SCORECARD 0.9 THE BALANCED SCORECARD AND PERFORMANCE MEASUREMENT.0 THE BALANCED SCORECARD AND PERSONAL DEVELOPMENT. CHAPTER SUMMARY 6 CHAPTER : EMPIRICAL STUDY 8. INTRODUCTION 8. METHODOLOGY REVIEW 8.. Data atherin and analysis review 8.. Sample selection 9.. Instrument selection 0.. Pilot study. INSTRUMENT DESIGN.. The desin o the questionnaire.. Incorporation o pilot study indins in the questionnaire. RESULTS.. Response rate.. Basic analysis 5.. Detail analysis 8... Primary objective 8... Primary objective- perormance manaement tool 9... Primary objective- personal development tool... Secondary objective... Secondary objective - perormance manaement tool... Secondary objective -personal development tool 8... Secondary objective Secondary objective - perormance manaement tool Secondary objective - personal development tool 5.5 ADDITIONAL COMMENTS FROM THE QUESTIONNAIRE 56

8 .6 CHAPTER SUMMARY 59 CHAPTER : CONCLUSIONS AND RECOMMENDATIONS. INTRODUCTION. CONCLUSIONS.. Conclusions on the demoraphics o the sample roup.. Conclusions on the primary objective... Perormance measurement... Personal development.. Conclusions on secondary objective... Perormance measurement... Personal development.. Conclusions on secondary objective... Perormance measurement... Personal development. RECOMMENDATIONS. ACHIEVEMENT OF THE STUDY'S OBJECTIVES.5 RECOMMENDATIONS FOR FUTURE RESEARCH.6 CHAPTER SUMMARY REFERENCES ANNEXURES Annexure A: Questionnaire Annexure 8: Data -All Annexure C: Enineerin Annexure D: Iron Makin Annexure E: Steel Makin Annexure F: Rollin Annexure G: Sta Annexure H: E- roles Annexure : F- roles Annexure J: G- roles Ill

9 LIST OF TABLES Table.: Number o people per department per radin (E, F and G role) 9 Table.: Selection matrix or method to issue questionnaire Table.: Summary o questionnaires received 5 Table.: Frequency distribution- perormance manaement questions Table.5: Frequency distribution- personal development questions LIST OF FIGURES Fiure.: The Balanced Scorecard Framework Fiure.: The components o a BSC 5 Fiure.: The Balanced Scorecard as a link in the manaement o a company's stratey Fiure.: The perormance manaement cycle in eective oranisations Fiure.: Response per department 5 Fiure.: Ae distribution o respondents 6 Fiure.: Gender distribution o respondents 6 Fiure.: E, F and G role response 7 Fiure.5: Perormance Manaement - averae response rate per question 7 Fiure.6: Personal Development- averae response rate per question 8 Fiure.7: Response to questions testin the eectiveness o the BSC as perormance manaement tool 0 Fiure.8: Responses to questions testin the eectiveness o the BSC as personal development tool Fiure.9: Response to questions testin the eectiveness o the BSC as perormance manaement tool 5 Fiure.0: Responses to questions testin the eectiveness o the BSC as personal development tool 9 Fiure. : Response to questions testin the eectiveness o the BSC as perormance manaement tool 5 Fiure.: Responses to questions testin the eectiveness o the BSC as personal development tool 55 iv

10 CHAPTER NATURE AND SCOPE OF THE STUDY. INTRODUCTION The Balanced Scorecard (BSC) mechanism o measurin perormance has since the initial development by Robert Kaplan and David Norton in the early 990's rown in popularity. Kaplan and Norton's aim was to develop a more balanced system o measurin perormance than simply usin short-term inancial results. The BSC helps to make stratey operational by translatin stratey into perormance and measurement tarets (Kaplan and Norton, 999: 5). The eectiveness o a perormance measurement system is dependent on the type o mechanism used to measure perormance. Old appraisal systems which mainly ocused on measurin inancial perormance (short term ocused) are no loner suicient and relevant to the present (continuously chanin) lobal environment. Emphasis has shited away rom only evaluatin and reportin on past results to a ocus o uture capabilities to serve the company's customers, retain and develop internal resources and maintain rowth. It was, however ound that within ArcelorMittal, Vanderbijlpark Works, people are oten very neative about the BSC. Comments oten made were the ollowin. The BSC does not relect the eort I put in. The BSC is not a air measurement o perormance. The Key Perormance Indicators (KPI's) on the BSC are not relevant to my job. My supervisor does not discuss my BSC with me. Show me how you will measure me and I will show you how I will perorm. The BSC is a worthless paper exercise. The purpose o this study is to research how eectively the BSC process is used to measure perormance and to encourae personal development o individuals within ArcelorMittal, Vanderbijlpark Works.

11 . PROBLEM STATEMENT The SSe tool has always been a hot point o debate. Traditionally the sse within ArclelorMittal was used only to measure perormance. Durin the last years, however, the company has developed the sse to accommodate a portion aimed at encourain the employee to sel-develop in terms o trainin and career development. Because the outcome o this tool is linked to remuneration - it is even more important to ensure that the sse meets the required criteria. It is the taret o ArclelorMittal, Vanderbijlpark Works, to (by end 009) be in a position to input the outcome o the sse discussion into Systems Applications Product sotware (SAP), whereater everythin will be electronically calculated up to the point o printin the payslips o the employees. This means no urther "manual" intervention by line manaers. The SSe interviews are held bi-annually. These iures are then combined to et to an annual value. This value is normalised throuhout the Works and used durin reward allocation. The problem is, that manaers still manually adjust some o these iures due to the results, not relectin the perceived perormance o the employee. The question is why? The consistent application and eectiveness o the SSe principles across the dierent business units in the Vanderbijlpark Works are also questionable. The objective o this research is to establish whether ArcelorMittal, Vanderbijlpark Works has successully developed and implemented the sse tool as: a perormance measurement tool, and a personal development tool.. OBJECTIVES OF THE STUDY The objectives o the study are divided into primary and secondary objectives.

12 .. Primary objective The primary objective o the research is to establish whether ArcelorMittal, Vanderbijlpark Works is eectively usin the BSC tool as: A perormance measurement, and A personal development tool... Secondary objectives The secondary objectives o this research are as ollows: To determine i there is a dierence between the eective implementation o the BSC as a perormance manaement and personal development tool within the dierent business units within ArcelorMittal, Vanderbijlpark Works. These units are Iron Makin, Steel Makin, Rollin, Enineerin and Sta (Secondary objective ). To determine i there is a dierence between the eective implementation o the BSC as a perormance manaement and personal development tool between dierent role radins (these roles are deined as E, F and G roles) in ArcelorMittal, Vanderbijlpark Works (Secondary objective ).. SCOPE OF THE STUDY ArcelorMittal South Arica Limited is the larest steel producer on the Arican continent, producin 6. million tonnes o liquid steel per annum. ArcelorMittal South Arica is part o the world's larest steel producer, ArcelorMittal. The company is the world's number one steel company, with employees worldwide. ArcelorMittal has an industrial presence in 7 countries across Europe, the Americas, Asia and Arica. ArcelorMittal is the leader in all major lobal markets, includin automotive, construction, household appliances and packain, with leadin Research and Development (R&D) and technoloy, as well as sizeable captive supplies o raw materials and outstandin distribution networks.

13 Vanderbijlpark Works is one o the steel operations in South Arica (also the larest producer o Flat Steel Products), with the other bein in Vereeniin, Newcastle and Saldanha. This research study was done in the Vanderbijlpark Works which has ±00 ull-time employees. O these employees ±800 (8.6%), are subjected to annual perormance reviews based on KPis identiied in BSCs. Included in this number, is a roup o 7 people consistin o middle manaement, supervisors, technical people, and administrative support (sta unctions includin Saety, Health, Environment and Risk (SHERQ), Inormation Technoloy (IT), Inormation Manaement (IM), Finance, Human Resources (HR) and Commercial). These employees unction in main business units within the Company (Enineerin, Iron Makin, Rollin, and Steel Makin) and was the sample used durin the research. For ease o reportin the research indins the balance o the sample has been combined as a Sta unction roupin. The 008 calendar year was used as the base date to ather data rom the empirical study..5 RESEARCH METHOD The research method will comprise both a literature review and an empirical study..5. Phase : Literature review In the literature review an in-depth study was done with reards to the Balanced Scorecard tool as a measurement instrument. Speciic research was done to determine the ollowin : Why is the BSC used as a tool to measure perormance? How is the BSC used as a measurin tool? What are the possible pitalls when usin the BSC? Can the BSC be used to encourae Personal (Sel) Development?

14 When is a BSC eective? The sources that were consulted, included the ollowin. Literature and published articles by Kaplan and Norton, and other known authors on this topic. Other research done in this ield o study. Related articles on the world-wide web. Internal published documents related to ArcelorMittal, Vanderbijlpark Works..5. Phase : Empirical study.5.. Research desin A quantitative research approach was ollowed but due to the explanatory nature o the research study, no hypothesis was ormulated. Inormation or the research on this subject was obtained rom both secondary and primary sources. Secondary resources included sources such as scientiic journals, textbooks, previous studies and the internet. The primary source o data was athered by means o an empirical study (seladministered questionnaires). Respondents were requested to complete an anonymous questionnaire and submit it via hard copy to a central point o receipt. Control o this process was centralised within the HR department o the Company. Permission was obtained rom both Manaement and the Unions to issue these questionnaires to the selected taret roup. The employees were assured that the inormation would be treated as conidential and that the results would be used only or research purposes. An initial pilot study was done by selectin a small sample o respondents rom the taret roup to complete a drat questionnaire. This sample indicated any problems respondents could have with the instructions or the items on the questionnaire. The 5

15 questionnaire comprised o an openin section requestin demoraphical data rom the respondents, ollowed by additional sections testin the eectiveness o both the BSC as perormance manaement tool and personal development tool. These sections were comprised o a number o scaled-response questions measured on a ive point Likert-type Scale and allowin or additional comments at the end o the questionnaire. The Likert-type Scale used, consisted o the ollowin choices: SA Stronly Aree, A- Aree, N- Neutral, D- Disaree and SO- Stronly Disaree..5.. Participants Employees within the E-, F- and G-role band in ArcelorMittal, Vanderbijlpark Works, were chosen to participate. A convenience samplin method purely based on availability was chosen. This roup is easily accessible (all located at the same premises in Vanderbijlpark) and suiciently homoeneous..5.. Measurin instrument The main measurin instrument that was used, was a questionnaire. This questionnaire was issued to the sample roup..5.. Statistical analysis Descriptive statistics and requency distributions were used to analyse baseline data..6 LIMITATIONS AND ANTICIPATED PROBLEMS This study was limited to ArcelorMittal, Vanderbijlpark Works and indins can thereore not be eneralised to the rest o the Group in South Arica. At present ArcelorMittal, Vanderbijlpark Works is acin touh economical pressures. It was, thereore, anticipated that (due to the voluntary nature o the request) a lare number o the sample would not complete and return the questionnaire. 6

16 People bein very neative about the BSC, miht not have responded at all and some o the participants miht not have been able to understand how this research could add any value to their uture rowth..7 LAYOUT OF THE STUDY The chapters in this mini-dissertation are presented as ollows. Chapter : Nature and scope o study. Chapter provided inormation on the backround to the selection o the research topic, the problem statement and summary o the proposed research method. Chapter : Literature study. Chapter summarised the overview o the literature study that was done on the proposed research topic. Chapter : Empirical study. Chapter ives the detail on the empirical study that was done, summarised data on the questionnaire returns and results and discussions. Chapter : Conclusions and Recommendations. Chapter concluded the indins made in Chapter and made recommendations to ArcelorMittal, Vanderbijlpark Works, on the way orward..8 CHAPTER SUMMARY The Balanced Scorecard is classiied as a perormance manaement tool. ArcelorMittal, Vanderbijlpark Works has been usin this tool or a number o years and comments oten made by employees question the deree o success o this tool. 7

17 O late the company introduced an additional section to encourae employees to sel-develop. The question arisin, is thus: has this tool been eectively implemented as a perormance measurement tool and a tool that encouraes people to sel-develop? In this chapter an overview was iven on the approach ollowed to try to answer the problem statement. In the ollowin chapter an in-depth literature review, discussin the ability to match the results enerated durin the empirical study, was done. 8

18 CHAPTER LITERATURE STUDY. INTRODUCTION Global competitiveness orces companies to ocus on advantaes o sustainin and ainin market share. For this reason developed strateies need to be implemented and tracked. Mistakes in the market place can be very costly and, thereore, manaers spend a lot o time and eort to stay ahead o competitors. The ability o a company to mobilize and exploit its intanible assets has become ar more decisive than investin and manain its physical assets (Kaplan and Norton, 996:). To be able to improve a company's perormance, one needs to control it; to be able to control it, one needs to understand it, and to understand it, one needs to measure it. The BSC is a tool that has been developed to assist manaers to measure the perormance o individuals and roups towards attainin set oals alined with the company stratey. In the past inancial measures were the only parameters used to determine a company's success - this, however, has chaned siniicantly as companies realised the importance o measurements o customer needs, internal business process perormances and innovation and learnin. This chapter will deal with the oriin o the BSC, the deinitions o the BSC, the need, beneits and components o a BSC, possible problems with the BSC and the BSC as both perormance manaement and personal development tools.. ORIGIN OF THE BALANCED SCORECARD Durin 990 the Nolan Norton Institute started a multicompany study deined as: 'Measurin Perormance in the Oranisation o the Future'. This study was motivated by a believe that existin perormance measurement approaches, primarily relyin on inancial accountin measures, were becomin obsolete (Kaplan and Norton, 9

19 996:i). Norton (at that stae the CEO o the company) was the study leader, assisted by Kaplan as the academic consultant. Durin the early staes o the project Kaplan contacted the CEO (Art Schneiderman) o a company, Analo Devices, to ask permission to investiate their corporate scorecard. Kaplan realised that this multidimensional scorecard was ar more useul or measurement o strateic initiatives. Many roup discussions were held which led to the ormulation o the now known Balanced Scorecard. This BSC was oranised around our distinct perspectives: inancial, customer, internal, and innovation and learnin. The Balanced Score Card name relects the balance provided between short-term and lon-term objectives, between inancial and non-inancial measures, between lain and leadin indicators, and between external and internal perormance perspectives (Kaplan and Norton, 996:viii). The indins o this study roup were documented in an article The Balanced Scorecard - Measures That Drives Perormance in 99. Ater this a number o executives were contacted to implement the BSC in their oranisations and this aain led to another round o developments with speciic ocus on strateic measurements. These indins were published in a second article in 99: Puttin the Balanced Scorecard to Work. Followin up to 996, an even larer number o developments were introduced and these indins were summarised in an article Usin the Balanced Scorecard as a Strateic Manaement System. Kaplan and Norton summarised the concept and the learnin up to this point (996) in their book The Balanced Scorecard.. DEFINITIONS OF THE BALANCED SCORECARD The BSC is a strateic manaement tool that provides the manaer with a clear and concise picture o the business's health and proress in reachin the oals o the business (Norton & Kaplan, 99: 7-79). The BSC is a set o inancial and noninancial measures relatin to a company's critical success actors. Kaplan and Norton describe the innovation o the Balanced Scorecard as ollows. 0

20 'The Balanced Scorecard retains traditional inancial measures. But inancial measures tell the story o past events, an adequate story or industrial ae companies or which investments in lon-term capabilities and customer relationships were not critical or success. These inancial measures are inadequate, however, or uidin and evaluatin the journey that inormation ae companies must make to create uture value throuh investment in customers, suppliers, employees, processes, technoloy, and innovation." The BSC provides executives with a comprehensive ramework that translates a company's vision and stratey into a coherent set o perormance measures (Kaplan and Norton, 996: ). The BSC includes not only historical (lain) perormance measures (such as inancial tarets) but also leadin indicators such as customer satisaction and expectations, and learnin and rowth opportunities. Kaplan and Norton (996: 7) deine the BSC as a "collision between the irresistible orce to build lon-rane competitive capabilities and the immovable object o the historical-cost inancial accountin model". This deinition implies that the BSC complements inancial measurements o past perormance with measures o the drivers o uture perormance (Kaplan and Norton, 996: 8). Kreitner and Kinicki (007: 70) deine perormance manaement as "the continuous cycle o improvin job perormance with oal settin, eedback and coachin, and rewards and positive reinorcement". Niven (00: ) describes the BSC as a careully selected set o measures derived rom an oranisation's stratey. The measures selected or the BSC, represent a tool or leaders to use in communication to employees and external stakeholders, the outcomes and perormance drivers by which the oranisation will achieve its mission and strateic objectives. Niven sees the BSC simply as a measurement system, a strateic manaement system, and a communication tool. The Balanced Scorecard Institute o South Arica deines the BSC as a manaement system that enables oranisations to clariy their vision and stratey and translate these into action. It provides eedback around both the internal business processes I I

21 and external outcomes, in order to continuously improve strateic perormance and results. When ully deployed, the Balanced Scorecard transorms strateic plannin rom an academic exercise into the nerve center o an enterprise. The our perspectives o the BSC (Kaplan and Norton, 996: -9) are deined as the learnin and rowth perspective; business process perspective, customer perspective, and inancial perspective. These perspectives are all linked by cause and eect loic- see iure. below. Fiure. The Balanced Scorecard Framework THE BALANCED SCORECARD FRAMEWORK Natural Cause and Eloc:t Loic c c- c J Knowlede, Skills, Systems and Tools And Reahse the VISION t To Orlve Financaal Success t Needed to Deliver Umque Sets o Beneits to Customers t To Build the Strnteic Capabtlities t Equip Our People Source: The Balanced Scorecard Institute o South Arica, 009. THE NEED FOR A BALANCED SCORECARD Oranisations today continue to rapple with the complex challenes o our chanin environment, brouht about by market demands, new technoloy and - more speciic in South Arica - the pressures bein placed on oranisational perormance due to a transormin workorce (Rampersad, 006: v). The well-known axioms "I you can't measure it, you can't manae it, because you won't know i it

22 improves" and " What ets measured ets done" summarise the need or a balanced scorecard. Kaplan and Norton (99:5) state speciically three reasons why compan ies need a BSC. No sinle measure or set o measures can adequately uide and motivate the current actions that drive uture perormance. Financial results are lain indicators (report past perormance) and are not adequate predictors or drivers o uture perormance. Companies need to balance short-term inancial perormance with lon-term rowth opportunities. Companies oten distort their current inancial perormance by not reportin the eects o current actions on the uture value o the company. Strateic objectives need to be linked to a set o inancial and operational measures in order to clariy and communicate the objectives. These linked objectives can then be used to evaluate perormance..5 THE BENEFITS OF A BALANCED SCORECARD The purpose o havin a BSC system or an oranisation should be to add value to the business and stimulate innovation and rowth. The BSC translates mission and stratey into objectives and measures, oranised into our dierent perspectives: inancial, customer, internal business process, and learnin and rowth (Kaplan and Norton, 996: 5). The BSC thus channels the enery, abilities, and knowlede o people towards the lon-term oals o the company. Some o the beneits o a BSC are the ollowin. It clariies and ains consensus about the company stratey. It communicates the stratey o the company throuhout the oranisation. It maintains a balance between the short-term inancial proits and lon-term competitive ability o an oranisation. It provides manaers with a tool to break down corporate level measures to the levels o the workers on the loor. This enables the workorce to reconise their contribution to the survival and rowth o the company (line o siht).

23 It serves as a ocal point or the company's eorts, deinin and communicatin priorities to manaers, employees, investors and customers. It helps the oranisation to ocus on breakthrouh perormance. It encouraes the process o innovation, learnin and rowth. Research outcomes o studies o the Corporate Leadership Council reveal the ollowin. Companies with perormance manaement prorams (BSC) have hiher proits, better cash lows, stroner stock market perormance, and a reater stock value than companies without perormance manaement. Productivity in irms without perormance manaement prorams (BSC) is siniicantly below the industry averae, while productivity in irms with perormance manaement prorams (BSC) is on par with the industry averae. Companies with perormance manaement prorams (BSC) siniicantly improved their inancial perormance and productivity ater implementin perormance manaement prorams (BSCs)..6 THE COMPONENTS OF A BALANCED SCORECARD Manaers reconise the impact that measures have on perormance in today's lobal competitive environment. Companies need to have a measurement system which drives actions that will ultimately lead to creatin value or its shareholders, while also encourain employees to be innovative and to row throuh the process o learnin and experiencin. The BSC ives a balanced view o the our main perspectives (as developed by Kaplan and Norton): inancial, customer, internal business process, and learnin and rowth. Every measure selected or the BSC, should be part o a link o cause-andeect relationship, endin in inancial objectives, that represent a strateic theme or the business unit (Kaplan and Norton, 996: 6). When used this way, the BSC is not a roup o isolated (unconnected) or conlictin objectives. These components are illustrated in iure. below.

24 Fiure.: The components o a BSC Financial. Customer Internal Business Processes "To satisy our shareholders Vision "To achieve our vision, how and should we Stratey and customers, appear to our customers?n. ~ Learnin a nd., Growth G) 0') 0') > G) "To achieve our -...., ~ - vision, howwill.; ~ ~i,: 0) we sustain our :e:= 0 I-.E ability to chane and improve?n what business processes must we excel at?n Source: Kaplan and Norton, The Balanced Scorecard: 996,.6. Financial perspective Financial measures are important and valuable in summarisin the readily measurable economic consequences o actions already taken (Kaplan and Norton, 996: 5). These measures indicate i the company's stratey, implementation and execution are contributin to the bottom line o the company (are these actions addin value and increasin proits?). All enery spent on improvin customer satisaction, quality and on-time delivery, will be o no use i there is no increase on returns. Typical inancial indicators include: operatin income, revenue rowth, return on equity, return on assets, economic value added, sales rowth and cash low. The BSC can make inancial objectives explicit and customise the inancial objective o each business unit within an oranisation. This enables manaers to improve the 5

25 line o siht o their unit responsibility towards to ultimate oal: to provide superior returns (to stakeholders) on invested capital. The BSC enables the manaer to speciy the metric by which the lon-term success o the business unit is measured, and the variables considered most important to create and to drive the lon-term outcome objectives (Kaplan and Norton, 999: 6 ). In simplicity, inancial oals are to survive, succeed and prosper. Survival is measured by cash low, success by rowth in sales and operatin income and prosperity by an increased market share and return on equity and capital employed..6. Customer perspective To be able to ormulate this perspective, manaers should know their tareted customer and market sement. This market sement will represent the source that will deliver the revenue component o the company's inancial objectives. Accordin to Niven (00: 5) an oranisation must answer the ollowin two questions. Who are our taret customers? What is our value proposition in servin them? Core outcome measurements in this perspective are: share o market, retention, acquisition, partnerships, loyalty, satisaction and proitability. These, however, aain are lain indicators. To develop leadin indicators, Kaplan and Norton (996: 85) suest that companies strive to select objectives and measures rom the ollowin three classes o attributes. Product or service attributes (this include price, quality, speed (time) o service, unctionality (it or purpose)), Customer relationship (quality o purchasin experience, personal relationships), Imae and reputation (brand awareness and strenth). The BSC demands that manaement must translate their eneral mission statement on customer service into speciic measures that relect the actors that really matter to the customers. Customers are normally concerned with lead-time, quality o 6

26 products and services, the company's perormance with reard to service and the cost-eectiveness o the product or service..6. Internal-business-process perspective To determine the internal-business-process perspective measurements companies must decide on what processes and competencies they must excel at and speciically measure each o them. Internal measures or the BSC should be derived rom the business processes that have the reatest impact on customer satisaction (actors that aect cycle time, quality, skill o the employees and productivity). To satisy customers and shareholders' expectations, a company may need to identiy entirely new internal processes rather than to ocus eorts on the incremental improvements o existin activities (Niven, 00: 6). Recent development incorporates the innovation process as a vital component o this perspective. Innovation hihlihts the importance o identiyin the characteristics o the market sement a company wants to satisy with new products and then also how to desin and develop these products. The BSC must thus allow or considerable weiht and measures to encourae research, desin and development work. Kaplan and Norton (996: 96) suest that a company's internal-business-process perspective can be developed by ollowin a eneric value-chain model which encompasses the ollowin three principal business processes. Innovation (research the emerin or latent needs o customers and create products or services that will meet the requirements or needs o the customers). Operations (producin and delivery o existin products and services to customers); and Post-sale service (service to customer ater the oriinal sale or delivery o the product or service). 7

27 The internal perspective examines areas such as operations manaement, customer manaement, customer relationships, innovation, product development, delivery, manuacturin, ater-sale service, reulatory and social processes..6. Learnin and rowth perspective A company's ability to innovate, improve and learn, correlate directly with the value o the company. A culture o innovation and continuous learnin can brin about eiciency in the operatin domain o a business. This ensures cost reduction and product dierentiation so as to meet the varied requirements o the customers. As a result, it strenthens the inancial ability throuh earnin hiher proits and retainin a larer share o earnins to inance the orthcomin expansion o uture projects o the company under consideration. Accordin to Kaplan and Norton (996: 6) the enablers or learnin and rowth come primarily rom three sources: employees, systems and oranisational alinment. They state that strateies to ensure superior perormance will enerally require siniicant investment in people, systems and processes that build oranisational capabilities. Niven (00: 6) sees this perspective as the oundation o the BSC. This perspective could contain both leadin and lain indicators. The learnin and rowth perspective is itemised by- human capital (competencies, skill, knowlede, and experience o employees), inormation capital (accuracy, availability, networks, inrastructure); and oranisation capital (leadership, alinment, culture). Indicators can be employee turnover, employee retention and attraction, employee skill levels, employee satisaction, amount o trainin hours, availability o inormation, continuous improvement initiatives, career opportunities, promotions within the company, personal alinment, team alinment and oranisational alinment. 8

28 .7 POSSIBLE REASONS FOR FAILURE OR PROBLEMS WITH THE BALANCED SCORECARD Many executives have commented that the BSC is not as simple as it seems. Manaers in both manuacturin and service oranisations have encountered some problems with the development, implementation and sustainin o the BSC. Kaplan and Norton (996: 8) suest that these ailures can be cateorised in main cateories: Structural deects (choice o measures), and oranisational deects (process o developin and implementin the BSC). Structural deects come about when manaers try to supplement already existin inancial measures with non-inancial measures like market share and customer satisaction. These non-inancial measures however, already contain deects o traditional inancial measures - they are eneric, lain and report on how well the company's stratey has worked in the past. Manaers need to balance leadin indicators with the lain indicators to achieve excellent lon-run inancial perormance (Kaplan and Norton, 996: 85). Oranisational deects come about due to inadequate development and implementation o the BSC. The BSC development should be led by senior executives and should not be based on eneral measures used by other industrial leadin companies, but be derived or breakthrouh perormance. The implementation o the BSC can sometimes be delayed as manaers try to perect the measurements. This can lead to a loss in momentum and enthusiasm. The BSC is a dynamic process and should be reviewed continuously - rather start the process and keep on learnin how to manae with a balanced set o perormance drivers and outcome measures (Kaplan and Norton, 996: 86). Schneiderman (999: 6) identiies six main reasons or ailures o the BSC.. The non-inancial variables are incorrectly identiied as primary drivers o uture stakeholder satisaction.. The metrics are poorly deined. 9

29 . Improvement oals are neotiated. These oals should be built on stakeholder requirements, undamental process limits, and improvement process capabilities.. There is no deployment system that breaks down hih-level oals to the level where actual improvement activities reside (loss o line o siht). 5. No state-o-the-art improvement system. 6. There is no (and cannot be) quantitative linkae between the non-inancial and anticipated (expected) inancial results. From the above it is evident, that the BSC can be successully developed, implemented and maintained when manaers keep to the basics by not conusin the employees with too many measures. Measures should be alined with the strateic oals o the company, by deinin the metrics well and by breakin the measures down to loor level where people can understand what is required o them..8 EFFECTWENESS OF MEASUREMENT AND THE BALANCED SCORECARD To determine when a BSC is eective, we have to understand the deinition o eectiveness. Coetsee (00: ) deines eectiveness as "doin the riht thins riht'. Coetsee (00: ) also correlates eectiveness with the 80/0 theory (Pareto Principle). This principle implies that when you are eective it means that 0% o your eort leads to 80% o your results, 0% o time spent should lead to 80% positive outcomes (eectiveness) and the use o 0% o resources should achieve 80% o results. Coetsee (00: ) deines oranisational eectiveness as a company's ability to: adapt to present and uture internal and external demands, expectations and constraints, inspire action and create outcomes which satisy stakeholders (clients, shareholder, owners, employees), realise the vision; and survive. 0

30 Kaplan and Norton (996) stress the importance o adherin to the ollowin three principles in order to develop a BSC that is more than a roup o isolated and eventually conlictin strateies and measures. Build in cause-and-eect relationships. Include suicient perormance drivers; and Provide a linkae to inancial measures. They also state that i data do not exist to support a measure, the manaement process or a key strateic objective is likely to be inadequate or nonexistent. The Corporate Leadership Council research suests that one should clearly deine perormance standards, and thereater, ensurin employee understandin o their objectives, is the sinle most eective driver o perormance. Additional keys to overall perormance manaement success include encourain a culture o risktakin, havin manaers provide employees with ood ormal and inormal eedback, and providin employees with the appropriate job development opportunities. Covey (999: 5) states, that his seven habits are bein eective because they are based on principles and thereore, they brin the maximum lon-term beneicial results possible. These habits become the basis o a person's character, creatin an empowerin center o correct maps rom which an individual can eectively solve problems, maximise opportunities, and continually learn and interate other principles in an upward spiral o rowth. Boyett and Conn (996: 75) ive the ollowin our uidelines or perormance measurement. All measures should be accomplishment-based. Measures should be roup- or team-orientated, not measures o individual employee perormance. When developin measures, seek a level o precision suicient or the purpose o the measurement, and use a amily o measures rather that try to orce one measure to serve as a ultimate indicator; and Measures should be reviewed and chaned, i necessary, when strateies chane.

31 .9 THE BALANCED SCORECARD AND PERFORMANCE MEASUREMENT Traditional inancial perormance measurements ive an excellent view o what happened in the past (lain indicator) but are inadequate in addressin the real value-creatin mechanisms in today's oranisations. These value-creatin mechanisms include intanible assets such as knowlede and networks o relationships (Niven, 00: ). The BSC complements the lain indicators with leadin indicators (drivers o uture economic perormance). The reat advantae o the BSC lies in the translatin o a company's mission into action plans and alinin employees with these actions. The BSC describe the key elements in achievin the company's stratey and is the cornerstone o a company's current and uture success. Fiure. below indicates that the BSC is a critical link (perormance measures - liht reen block) in the closed loop (continuous) process o ormulatin stratey throuh to inal evaluation and assessment. From this it is evident that the BSC should be a dynamic process which should be chaned as the need or a chane in the stratey arises. Fiure.: The Balanced Scorecard as a link in the manaement o a company's stratey. Source: The Balanced Scorecard Institute o South Arica, 009

32 Perormance manaement can also be described as a systematic process by which a company involves its employees as individuals and members o a roup, in improvin oranizational eectiveness in the accomplishment o the company's mission and oals. Employee perormance manaement includes: plannin work and settin oals and expectations, continually monitorin perormance and ivin eedback to the individual, developin the capacity to perorm (learnin and rowth), periodically ratin perormance in a summary ashion ; and rewardin ood perormance. In eective oranizations, manaers and employees practise ood perormance manaement naturally all their lives, executin each o the above-mentioned key components in the process well. Goals are set and work is planned routinely while proress toward these oals is measured and employees et reular eedback. To ensure eectiveness, hih standards (with clear measurements) are set, but care is also taken to develop the skills needed to reach each o these expectations. Both ormal and inormal rewards are used to reconize the behavior and results that accomplish the mission. All ive component processes workin toether and supportin each other, achieve natural, eective perormance manaement. Fiure. below illustrates this continuous process. Fiure.: The perormance manaement cycle in eective oranisations. Source: unknown

33 For the BSC to be a successul perormance measurement tool the ollowin needs to be done. The stratey need to be clear, areed upon and well communicated. Departmental and personal oals need to be alined with the stratey. Measurement metrics need to be accurate. The strateic objectives need to be linked to inancial results and lon-term tarets. Periodic strateic reviews need to be conducted; and Lessons learnt need to be built into uture measurements (continuous improvement)..0 THE BALANCED SCORECARD AND PERSONAL DEVELOPMENT The BSC allows or a mix o actors to be included to measure oranisational and individual perormance. These include strateic intent, well-deined values, strateyalined structure, sound processes, couraeous leadership, skilled people and importantly, a hih perormance and learnin culture. The learnin and rowth perspective o a BSC is the lue that holds it all toether and dierentiates the oranisation rom its competitors (Rampersad, 006: v). The objective o the learnin and rowth perspective is to provide the inrastructure to enable ambitious objectives in the other three perspectives to be achieved (Kaplan and Norton, 996: 6). The BSC stresses the importance o investin in the uture. These investments include people, systems and procedures. Accordin to Kaplan and Norton (996: 7) the ollowin three principle cateories or the learnin and rowth perspective apply. Employee capabilities. Inormation system capabilities; and Motivation, empowerment and alinment.

34 It is thus evident that this perspective is important in the sel-development process o an individual. Dr Hubert Rampersad (006: 5-6) notes that both individuals and manaers can reatly beneit rom a well-structured personal balanced scorecard. These beneits include the ollowin. For the individual. Greater understandin o the sel and increased sel-esteem. Sel-actualisation. Greater enjoyment and inner involvement in the work (happiness is enhanced at the work by reducin the ap between company lie and normal lie). Workin smarter instead o harder (we become more creative as we row, we become ood time-manaers). Greater usae o individuals' mental capacity and productivity; and Increased personal responsibility (more competent people become more conident to take on more complex work). For the manaer. Hiher employee enaement. Greater customer satisaction (employees deliverin quality work on time). Improved employee perormance. Intrinsically motivated employees. Less absenteeism and rievances or the oranisation (stress and burnout are reduced). Individual and team empowerment (individuals start to trust ellow workers and share personal ambition and knowlede). Increased innovation. Eective talent manaement (takin up challenes and developin o related skills). Eective diversity manaement; and Sustainable oranisational eectiveness. 5

35 It is evident that this portion o the BSC translates personal vision into concrete personal tarets and actions or improvement, providin the basis or balancin personal aspirations with personal behaviour (Rampersad, 006: 7).. CHAPTER SUMMARY The BSC is a tool that measures perormance o a company in our perspectives: inancial, customer, internal-business-process and learnin and rowth. In this chapter a literature study was done to analyse the backround on the BSC, research dierent deinitions o the BSC, understand the our perspectives o the BSC, determine when a BSC is eective, and investiate the BSC as personal development tool. It was concluded, that or the BSC to be eective the ollowin are prerequisites. Employees need to have participated in the compilation o their BSC. Employees must et eedback on their perormance. KPis need to be clearly link to the business stratey. KPis must be measurable and have direct line o siht (the employee must be clear on what he has to do to contribute to the bottom line). KPis must be linked to inancial ains. KPis must inspire action and create outcomes which satisy stakeholders (air, achievable); and Some KPis must measure team perormance (not only individual). Personal development orms a very important part o the BSC and this learnin and rowth perspective orm the base to successully manae the other three perspectives. From the literature review, the ollowin is clear. The BSC should include a personal development KPI as part o the learnin and rowth perspective. This KPI should encourae sel-development. This KPI should encourae innovation. 6