BALANCED SCORECARD: A NEW APPROACH

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS BALANCED SCORECARD: A N...
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Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

BALANCED SCORECARD: A NEW APPROACH Júlio Miranda Pureza Universidade do Estado de Santa Catarina (UDESC) – [email protected] Luiz V. O. Dalla Valentina Universidade do Estado de Santa Catarina (UDESC) – [email protected] Abstract: Balanced scorecard models may be a proper alternative for the anticipation of the changes on the environment in the sense that they supply a reliable picture of of the firm and translate the organization’s vision and strategy into a set of supporting factors. Their application allows the identification of an adequate set of performance indicators that take into account financial and nonnon-financial assets. The balanced balanced scorecard we non-propose here considers a small set of perspectives and suits profitable or non profitable organizations, services sector and supply chains. The continuous evaluation and improvement process, as well as the intangible assets are explicit elements elements of the model, which structure, that evolve people from all sectors and hierarchical levels, favors the communication of ideas, the exposition of the different points of view and the detection of changes in the environment. Keywords: Strategic planning, planning, balanced scorecard, continuous improvement

1

Balanced scorecard models

At the 80’s and 90’s, academics and consultants proposed a number of models for developing balanced scorecards. These models supply an answer to the necessity of balancing the usual single-minded financial measures with an additional focus on nonfinancial ones (Epstein and Birchard, 1999; Hronec, 1993; Kaplan and Norton, 1996; Lynch and Cross, 1995; Rummler and Brache, 1995). They give a more complete picture of the business, in opposition to the historic view and short-term perspective that characterize the financial measures. In fact, by the analysis of a small set of vital non-financial factors, it would be possible to identify reliable long-term financial results.

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

Kaplan and Norton (1992, 1997) proposed the most successful balanced scorecard model that breaks out the performance measurement into four perspectives: financial, customers’, internal processes and innovation and learning (see figure 1). However, there are other balanced scorecards that organize the corporate measures in a similar way into three to five perspectives (Edvinsson and Malone, 1997; Olve, Roy and Wetter, 1999 and Maisel, 1992; Boivin, 1996 and Simmons, 2000). Private sector

Non-profitable or public organizations

Strategy

Mission

Financial perspective

Fiduciary perspective

‘If we succeed, how will we look to our shareholders?’

‘If we succeed, how will we look to our trustees?’

Customers’ perspective ‘To achieve our vision, how must we look to our customers?’

Customers’ perspective ‘To achieve our vision, how must we look to our customers?’

Internal business perspective ‘To satisfy our customers, at which processes must we excel?’

Internal business perspective ‘To satisfy our customers, at which processes must we excel?’

Learning and growth perspective Learning and growth perspective ‘To achieve our vision, how must our organization learn and improve?’

‘To achieve our vision, how must our organization learn and improve?’

Figure 1 – BSC perspectives: perspectives: private and nonnon-profitable and public organizations (Kaplan and Norton, 2004).

The financial perspective corresponds to the traditional analysis that considers longterm objectives and short-term results and it is the main measure for the success of the strategy. The customers’ perspective is related to the clients’ expectations, identifying the segments in which it is possible and convenient for the firm to compete, in a clear relationship with the profitability of the business and the satisfaction of the shareholders. The third perspective evaluates which processes aggregate value to the products and services according to the customers’ point of view. It indicates a way to achieve excellence and how to reduce expenses by eliminating processes that do not

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

aggregate value. Finally, the innovation and learning perspective evaluates the capacity of the firm to renovate and to survive all over the years. It identifies which actions must be performed to prepare the people and the organization for the future. In this sense, it is critical the role of the organizational culture, the employees and the management of information. The strategic maps (Kaplan and Norton, 2004) complete this analysis, describing the dynamics of the process. It details the cause and effect relationships among the perspectives of the model in such a way that each link corresponds to a performance indicator (see figure 2). Moreover, eventual lacks of consistency in the strategic plan can be identified by the absence of connections between its elements. Productivity strategy

Growing strategy

Long-term shareholder value

Financial perspective Improve the cost structure

Prices

Costumer perspective

Increase assets utilization

Avaliability Quality

Functionality Selection

Product/service attributes

Internal perspective

-

Operations management processes: Supply Production Distribution Risk management

Expand revenue opportunities

-

Partnership Services

Relationship

Customer management processes: Selection Acquisition Retention Growth

Enhance customer value

Innovation processes: - Opportunity identification - R&D portfolio - Design and development - Launch

Brand

Image

Regulatory and social processes: - Environment - Safety and health - Employment - Community

Human capital Learning and growth perspective

Information capital Organizational capital Culture

Leadership

Alignment

Figure 2 - Generic strategic map (Kaplan and Norton, 2004).

Teamwork

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

However, the focus of these models is to manage a current strategy, communicating its details, motivating people to execute its plans and enabling the executives to monitor results. There is a great difficulty to deal with the formulation of a new strategy (Kaplan and Norton, 1997 and Yee-Chin, 2004). Another important aspect to consider is the necessity of a cyclic process for the evaluation and improvement of the strategy. It demands important changes in the culture of the organization, with evolvement of the employees to the strategic questions and empowerment. In fact, Kaplan and Norton’s balanced scorecard is very efficient to describe the forces that conduct any firm, but it seems to be possible to extend its objectives after few changes in its structure and in the way it is applied. In non-profitable organizations and public institutions, the financial perspective does not generate objectives to be reached but budget restrictions for the actions to be executed (Kaplan and Norton, 1997 and Flak and Dertz, 2005). In this case, the success of the strategy is given in terms of the capacity to serve the community with the available resources, what corresponds to a significant change in the model structure, as shown in figure 1. On the other hand, it is necessary to take into account partnerships like the supply chains, and include processes that aggregate value to the products and services but are realized outside the firm (Normann and Ramirez, 1993). Some recent studies (Flak and Dertz, 2005; Yee-Chin, 2004 and Maltz, 2003) indicate other limitations in the model, in the sense that it fails to highlight the role of the employees, suppliers and the community and in order to distinguish properly means and ends. Moreover, several organizations have included additional perspectives in their implementation of the balanced scorecard, improving the ‘missing’ stakeholders’ focus. For example, Best Foods included a ‘people development’ perspective while some European companies, like Nokia, introduced perspectives that focus the importance of the human resources (Flak and Dertz, 2005). Yee-Chin (2004) also claims that the success in the implementation of a balanced scorecard is more likely to occur if the firm has previous experiences in developing strategic planning. In other words, there seems to exist an intrinsic difficulty for the model to formulate a new strategy from the beginning.

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

2

The model, its perspectives perspectives and systematic

One of the main difficulties of the strategic planning is the absence of reliable information about the organization and its environment. For this reason, one of the basic elements of our model is the existence of three specific teams to manage the stages of the cyclic process shown in figure 3. Conduction team Mission and vision

Directives

Objectives, Indicators

to prioritize the actions

Directives

Strategic diagnostic

Definition of the strategy

Detailed analysis

Implementation of the plan

Evaluation and improvement

Information

Analysis

Strategic map

Tactical and operational

Information

Execution team

Continuous improvement team

Figure 3 – The structure of the model in terms of the teams that conduct the process.

Some high rank employees constitute the conduction team and represent the direction of the firm. This group defines the general lines of the plan and is responsible for the decisions to be made. The execution team does all operational work during the formulation of the strategy. It collects information about the internal and external environments, makes any necessary analysis and details the actions to be performed. It is convenient for the team to comprise people from all areas of the firm, to reduce the possibility of conflicts and improve the quality of the information. The third team is responsible for the implementation of the strategy and its evaluation. It is an extension of the execution team, combining people from all sectors of the firm. Moreover, there is a systematic process of substitution of its members, in order to favor the participation, commitment and empowerment of the employees. There is a leader that organizes all work and is the link between the team and the conduction team.

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

The constitution of the teams is a fundamental aspect for the identification and for the solution of the strategic dilemmas: the conduction team guarantees the necessary commitment of the board of directors with the strategy while the other groups supply the technical support to the project. It is important to involve other employees, during area meetings and presentations, when their participation will be stimulated, in order to identify present and potential problems and to help the execution team in the operational work. It may be necessary to contract expert consultants to give technical support and an external view of the situation, but the company staff must conduct the process. The model comprises four perspectives, being the second one the customers’ perspective, present in all balanced scorecards (see figure 4). Strategy

Powerholders’ perspective ‘If we succeed, how will we look to our powerholders?’

Customers’ perspective ‘To achieve our vision, how must we look to our customers?’

Process’ perspective ‘To satisfy our customers, at which processes must we excel?’

Resources’ perspective ‘To achieve excellence, how do our organization must use its resources?’

Figure 4 – The perspectives of the model.

Our first perspective represents the point of view of the group that will be the ultimate responsible for any strategic decision, from now on denominated powerholders, no matter if it is a private enterprise or a public organization. They consider the situation in terms of the final results, which generally means profitability and expansion of the

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

market share, but it may also consider social return or publicity for the firm. This point of view assures the application to non-profitable and public organizations with no changes in its systematic and in the cause and effect relationships. This perspective represents a further enhancement of the focus on non-financial measures and assets. In most cases, it indicates the financial criteria as the main measure for the success of a strategy but, unlike other models, it conducts to the inclusion of non-financial measures at the highest levels of the scorecard. This is a relevant change, in opposition to the usual short-term perspective that still dominates the strategic planning process. Moreover, it highlights the role of the community and the employees in the decision process, which is a limitation in other models (Flak and Dertz, 2005; Yee-Chin, 2004 and Maltz, 2003). Our third perspective considers any process that aggregate value, inside or outside the firm. This approach is an answer to the necessity of including processes that are performed by suppliers and partners, but are very relevant for the competitiveness of the firm (Normann and Ramirez, 1993). Moreover, this perspective allows the evaluation, at the operational level, of the social responsibility actions, supported by the firm but generally executed by other organizations. At last, the resources’ perspective considers tangible and intangible assets that give support to any action to be performed by the firm. It includes the physical and financial resources, the market share, the organizational culture, the information system, the employees’ capabilities and the image of the firm. Moreover, this structure avoids any misunderstanding among means and ends that would come when both aspects are described according to the same financial perspective (Flak and Dertz, 2005; Yee-Chin, 2004 and Maltz, 2003). The resources’ perspective indicates the means for the realization of the strategy, while the powerholders’ perspective is related to its final objectives. As seen in figure 5, the powerholders’ and customers’ perspectives represent the expectations that will conduct to the definition of the strategy. On the other hand, the choice of a strategy depends on the present structure and on the changes to be done. The processes’ perspective supplies a picture of the organization, including its

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

partners, and exposes the characteristics that differ the firm from the competence. The resources’ perspective completes the picture by identifying the dependence between the actions to be performed and the resources that are available and will be necessary further on. Powerholders’ perspective

- Mission of the firm - Vision of the firm

- Opportunities - Menaces Customers’ perspective Weaknesses

Strengths

Processes’ perspective

Resources’ perspective

Improvement

Figure 5 – The strategic diagnostic and the perspectives of the model.

3

Formulation of the strategy

As seen in figure 3, the conduction and execution teams are responsible for the formulation of the strategy. This stage is divided in three activities: to elaborate the strategic diagnostic, to choose the strategy and to detail it in terms of objectives and actions. The strategic diagnostic is the result of a discussion about the firm in terms of the expectations for the future. It is considered how the powerholders see the business and what their vision of the future is. However, the achievement of the mission and vision of the firm depends on an adjustment of the processes on the demands of the markets,

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

satisfying the constraints imposed by the resources and the culture of the organization, as shown in figure 5. This stage begins with an appreciation of the external environment and the organization, making use of all available information. The execution team collects material for the analysis according to various criteria, such as alternative scenarios, competitive environment analysis, growth-share matrix, functional analysis or valuechain approach (Ansoff, 1977; Porter, 1986; Stern and Stalk, 1998). All this information allows the identification of the opportunities, menaces, strengths and weaknesses to be faced by the firm. It can be done through the application of the Delphi method (Linstone and Turoff, 1975). It is requested to each member of the group to enumerate the main aspects of the strategic panorama, filling the table in figure 6.

Mission of the firm:

Vision of the firm:

Opportunities:

Strengths:

Relations between the elements of the strategy. Menaces:

Weaknesses:

Figure 6 – The strategic panorama.

For instance, answering questions like the following may fill the central blank: -

Which opportunities are compatible with the vision of the firm?

-

Which menaces must be surpassed to reach the vision of the firm?

-

In a given scenario (opportunities and menaces), which strengths constitute competitive advantages for the firm?

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

-

In a given scenario (opportunities and menaces), which weaknesses may inhibit the action of the firm?

-

Which actions must be taken to eliminate a particular weakness?

-

Which actions must be taken to amplify a particular strength?

-

At which extent the strengths and weaknesses are related?

The general result is presented and analyzed by the group and the table is filled again. The process continues until the opinions of the members converge. The conclusions are presented to the conduction group so that they make contributions to the work. The second stage corresponds to the definition of the strategy to be taken. In fact, the strategic diagnostic allows the conduction team to identify alternative strategies and choose the most adequate for the firm. The execution team supports this work by obtaining any necessary information and evaluating the results of the decisions at the tactic and operational levels. Market attractiveness

Competition

Time for results

Human resources

....

ω1 = ........

ω2 = ........

ω3 = ........

....

..................................

P1 = ........

P2 = ........

P3 = ........

..................................

P1 = ........

P2 = ........

P3 = ........

..................................

P1 = ........

P2 = ........

P3 = ........

..................................

P1 = ........

P2 = ........

P3 = ........

..................................

P1 = ........

P2 = ........

P3 = ........

ω4 = ..... ... P4 = ..... ... P4 = ..... ... P4 = ..... ... P4 = ..... ... P4 = ..... ...

Actions / objetives

Total

....

Σ Piωi

....

Σ Piωi

....

Σ Piωi

....

Σ Piωi

....

Σ Piωi

Figure 7 –Evaluation of alternative strategies.

The choice of the strategy can be done through the application of the Mudge technique (Mudge, 1989). The conduction team identifies each alternative strategy in terms of the objectives to be reached and actions to be performed. Then, each member of the group compares these possibilities by filling a table like the one in figure 7 that considers (Ansoff, 1977): -

Attractiveness versus competition in target markets;

-

Short term and long term results;

-

Risk analysis;

-

Necessity versus availability of resources;

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

-

Synergy with the present situation.

Then, the group analyzes the general result, obtaining a reliable picture of the situation that will support the choice of the strategy. At the third stage, the execution team details the strategy. This description is obtained from the construction of the strategic map with the identification of the cause and effect relations among the elements of the strategy (the links in figure 8).

Powerholders General objective 2

General objective 1

General objective 3

Customers

Expectation 2 Expectation 1

Expectation 3

Expectation 4 Processes

Process 3

Process 1

Process 5 Process 2

Process 4 Resources

Resource 1 Resource 2

Resource 3

Resource 4

Figure 8 – Generic strategic map

The process begins with the definition of the general objectives of the strategy by the board of directors (powerholders’ perspective). This is the higher level of the strategic map in figure 8. However, to reach these objectives is a consequence of the capacity of the firm to satisfy certain expectations of the market (customers’ perspective) that compose the second stage of the strategic map. Moreover, to satisfy these expectations and objectives, it is necessary to change and improve some critical

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

processes (the third stage of the map), demanding a characteristic set of human and physical resources (the fourth stage of the map). Each cause and effect relationship is a link in the strategic map and corresponds to a set of actions to be described by the execution team. At this moment, it is important to evolve more people and to extend the analysis to the tactic and operational levels, with a rigorous evaluation of the needs, the functional structure and the management of information. On the other hand, the identification of the links and related actions allows the definition of the set of performance indicators for the strategy.

4

Final considerations

Our balanced scorecard model contributes to the state of art in the sense that it proposes an original structure with some new concepts and criteria. Is seems to be very effective to translate the firm’s vision and the restrictions of the environment into an adequate strategy. Its application supplies a reliable picture of the firm, taking into account tangible and intangible assets, the employees, partners and the community. Moreover, there are some aspects to emphasize:

-

It analyzes the firm and its environment according to a small set of perspectives, which simplifies the analysis to be done, the construction of the strategic map and the performance evaluation;

-

It suits different kinds of organizations and the formulation of a new strategy. In special, the model may be applied to public organizations, services sector and supply chains. Independently of the vision of the firm, the management structure and the evaluation criteria, it is possible to maintain the same structure, with similar questionings, teams and procedures;

-

The continuous evaluation and improvement process is an explicit element of the planning. It supplies reliable information for the formulation and improvement of the strategy;

Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

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The model promotes the participation and commitment of the employees and the direction of the firm. It is a consequence of the structure of the teams and the relationship between the strategy and the continuous improvement process;

-

The structure of the teams, that evolve people from all sectors and levels, favors the communication of ideas, the exposition of the different points of view and the detection of changes in the environment.

A version of this work was submitted to the European Journal of Operational Research in October, 2005 (EJOR-D-05-00804).

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Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

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Third International Conference on Production Research – Americas’ Region 2006 (ICPR(ICPR-AM06) IFPR – ABEPRO - PUCPR - PPGEPS

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