Balanced Scorecard & History
Balance Scorecard was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information. A balanced scorecard is a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Balanced scorecards are used to measure and provide feedback to organizations. At its most basic level, the Balanced Scorecard helps organizations to clarify their strategy and communicate the business’s top strategic priorities and objectives. To understand and work towards balanced scorecard management tool, organization has to understand four basic perspectives of the scorecard which is explained as below.
Perspective of the Scorecard
Financial Perspective. (How do we look at Shareholders?)
Financial perspective emphasis on two aspects in the organization, 1st how organization is sustaining or increasing its topline i.e. sales and 2nd how they are driving their operations with utmost productivity with minimal cost. Financial perspective really demands organization to think from an investor’s standpoint in regards to what the financial result should be and whether financial results are attractive for any investors to invest!
|
Sr.No |
Goal Area |
Measurement |
|
1 |
Productivity |
· Cost per unit · Productivity Ratio |
|
2 |
Growth |
· Sales from · Existing product · New product · Region – Sub region · New / Existing customer · Market share |
Customer Perspective (How do customer sees us?)
In order to achieve the goals of financial perspective it becomes very important for any company to work on the customer perspective. If you would have noticed many of the mission statement of the companies revolve around the values they give to the customer, for example the mission statement of the Amazon is “’we aim to be earth’s most customer centric company”. How a company is performing from its customers’ perspective has become, therefore, a priority for top management. The balanced scorecard demands that managers should keep customer in center and understand all the components mention in balanced scorecard to rally decide and understand what it needs to monitor and understand performance so that next decision can be made rationally.
Customer’s value can be generated by addressing to the main concerns of the customer like price, quality, time, performance and service. We can take following example for defining the goals and measure of the customer perspective.
|
Sr.No |
Goal Area |
Measurement |
|
1 |
Price |
Depending on the product nature, its feature, function and market competitor what would be acceptable price from customers should, what are my average price vs. price intended
|
|
2 |
Responsive Supply |
On time delivery as expected by the customers |
|
3 |
Partners |
In order to ensure product reaches to customer, what partners strategy organization has to adapt and how to understand progress performance becomes one of the criteria |
Internal (What we must excel at?)
How strongly organization achieves goals of the customer perspective will be depend on how enterprise focus on the internal perspective and define the goals of the same. At the end of the day customer satisfaction can be achieved through processes organization has set which fulfill customers need and want within their own context. The internal measures for the balanced scorecard focuses on the business processes that have the greatest impact on customer satisfaction—factors that affect cycle time, quality, employee skills, and productivity. Companies should also attempt to identify and measure their company’s core competencies, the critical technologies needed to sustain the market. Companies should decide what processes and competencies they must excel at and specify measures for each.
|
Sr.No |
Goal Area |
Measurement |
|
1 |
100 % Functioning of the process |
Process Audit Compliance % |
|
2 |
Production |
· Production Planning Achievement · Capacity utilization · Cycle time / Lead time |
|
3 |
Customer Management |
· Customer query resolution timeline · Responsive timeline to customer |
|
4 |
Innovations |
· New product launch mechanism |
Learning & Growth (Can we continuously improve and create value?)
In order to achieve financial objective, customers need and expectation has to be delivered, in order to deliver those, organization has to run their internal operations with efficiency and effectively. At the end of the day, internal operations are driven by critical 3 stakeholders – Those are people, information, and culture it brings to its people. As global competition intensity rises, organization has to work towards continual improvements in all 3 areas of learning and growth. Organization has to plan long term growth development for its people in terms of learning as well as their exposure where they also feel challenged and at the same time satisfaction. Organization also has to plan how information in organization passes and helping them to achieve overall objective. In the end, organization has to work towards creating a platform, a culture which focuses on continual improvements, and its ability to innovate to overcome all hurdles.
|
Sr.No |
Goal Area |
Measurement |
|
1 |
People Satisfaction |
1. Retention ratio 2. % of leaders new certified skills Year on year 3. Satisfaction ratio |
|
2 |
Technological Adaptation |
1. System utilization % 2. Manual report Vs System generated reports |
In order for any organization to grow it need good profits and increase revenue with optimize costs which is enabled by more sales and more number of happy customers and in order to gain happy customers the organization have to ensure smooth operations and practices and in order maintain those operations it needs happy people so this becomes a loop. And balance scorecard simply tell us if any of those are weather working according to the expectations or not and gives a good insights for making the strategy for any organization
A Case study of Scorecard in FMCG
Major challenge we noticed while we were consulting a client in the FMCG industry was that the team was working endlessly but did not have specific goals other than sales who obviously had their targets. There were no understanding of organizational health chart, what we could only see was the sales, and in order to improve there was little to no data whatsoever. The other challenge was the way management was involve across organization, from micro to macro – Management was involve in every actions, this according to us took a big bite of management in managing operations rather than focusing on growth part as well. We introduced couple of strategies, few of them was to get respective leaders on board and delegate areas to them and at the same time in order to understand leaders performance along with organizational performance – we introduced Balanced Scorecard. We deployed those with other many projects, at start it was all chaos to get the structure data but in time of 2 months we were able to set the balance scorecard systems and now every department became measurable from purchase to stores to logistics to sales we can measure everyone and now everyone had their goals to work upon. Team had clear idea where they need to focus, previously non valued actions were given the same priority, but with the help of balanced scorecard, it was easy for team to understand impact of their actions across overall achievement of organizational objective and goals. At the end, team was satisfied, work life balance improved, communication across departments, and cross team collaboration improved, and we could see change in overall behavior as part of the culture for vision of the enterprise and growth journey became faster.
The Challenge of the Ceramic tiles Industry
All the industry has their unique problems and majority of them gets solved by the team working in the organization but it becomes very important to draw the attention of team in that direction and scorecard does wonder for that. Scorecard is more of the strategic management tool rather than the measurement tool. 2 years ago we were working with one of the client in the ceramic industry and we were involved in many projects, from which one of the project was the establishing the operations and monitoring tools for the team. We established the parameters for all the departments from finance to sales to procurement and operations as well. We started monitoring the performance of the company and we noticed through scorecard that the company was getting good sales numbers but it was still running in the negative cash flow so we started going in the depth of the reasons and it pointed to one direction that the sales team was actively involved in sales of the products and establishing the territory but they lost their focus from the collection. Based on multiple discussion, we changed the strategy and gave the sales support, accounts and sales team a common goal of the collection and we started publishing the scorecard on weekly basis of the collection with different zones, states, cities and others. During every review, there are small to big tweak in terms of approach, each team members interacts and participation of team was really encouraging. At the end, team felt they have earned their pride and as we all know happy team drives organization to top of the mountain.
Endless possibility for Construction Company
In Indian GDP, construction sector contributes more than 7% and it rank 2nd highest in its industry group. Construction is also one of the highest paid sector, as it involves more man power compare to its other industry sector and due to volatility, construction sector always faces significant challenges. Some of the common challenges are skilled labor shortage, productivity levels, rising cost of material and so forth. As Construction Company is no different than any other company, they faces same fundamental challenges like any other organization, adopting or implementing balanced scorecard can help company to correlate their strategies with long term vision and objective.
Balance scorecard can play pivotal role for construction companies since it focuses on each possible strategic area of organization. There are endless possibilities of getting benefit of balanced scorecard, some of them are
Learning & growth perspective
As cost of labor rises day by day, with shortage of skilled labor – Organization can really look into what % of labor they should keep it as permanent and also to identify possibility of increasing their knowledge and skills for long term association. This can be identify and monitor through number of metrics from balanced scorecard.
Customer Perspective
Owning a property (Residential or Commercial) is always a dream of most of individuals, hearing market voice and customer feedback can really help company to decide further course of actions. Their feedback can also help in understanding the brand image which is already established in the market. Some of the measurement company can considers are Brand image Index, Customer rating, No of complaints, Customer loyalty index
Internal Perspective
One of the challenge area for Construction Company is productivity and timely completion of projects. In order to be productive and ensure projects / tasks completes on time, there are number of metrics company can monitor in order to understand where they can intervene and get things done faster. Some of the metric company can use are lead time for purchase, inventory levels, risk associated in terms of dependency on only one supplier, all this metrics along with others can help company trigger alertness and take necessary actions to ensure timely completion of projects.
Financial perspective
In construction or any other organization, at the end it all comes to financial numbers, if organization is not making profit then the future of organization becomes dizzy. In most of the organization we have observe that organization is only emphasis on couple of financial parameter such as profit and loss and cash flow, however for long term sustainable business, organization also has to consider some of the aspects which helps them manage finance in much better way. Some of the parameter organization can measure are
– What is their revenue / employee – this helps them In setting benchmark and be innovative and productive to get most from the team ability
– Return on net assets – help organization understand and utilize as much as resources / asset to have return faster.
– Quick ratio OR Acid test ratio – this helps organization understand their strength towards paying their current liabilities without utilizing or converting their assets to cash.
Construction industry is volatile in its nature, there are number of external factor can affect the entire project for timely completion. Balanced scorecard here can helps in identifying all internal and external factors to determine where organization is lacking or falling behind, and can work right up to meet the overall objective and goals.
Author:
Agam Shah, A senior Business Analyst who is pursuing MBA in Finance has a varied experience in industries like Ceramic, Fashion retail, Garment Manufacturing, Food FMCG etc. He is an ambivert who loves spending time on research, listen to the soundtracks all the time while working. Dance along with photography and cinematography runs in his blood. Superheroes can still inspire his daily routine, another full time day dreamer in the team!
Guide:
Saurin Parikh, who has done 
Masters in International Business and Management Information System from Texas, is also a Certified Business Analyst. He started as a business analyst with Jagdish Hirani & Associated, is currently leading the core operations of transformation projects. He has wide experience in industries like home furnishing, diamond, tourism, food sectors etc. He is Observant, Conscious about facts, Patient, Positive, gives attention to detail and believes in total Completeness.
Success Mantra – “You have to touch ground (foundation) to make perfect organizations. Right methods with consistent approach are bound to yield results”
About J.Hirani: J.hirani is a Strategic Transformation team which works as a growth partner for different organisations in various industries by providing services like Agile transformation, Scenario mapping, Strategic alignment, Balance scorecard, Digital transformation, Incubating new ventures, Operation excellence and Aligning human capital.
©J.Hirani, Balanced Scorecard in FMCG, Ceramic and Construction Industry, September 2020. All rights reserved.
