BSC shows strategic goals with the ways to achieve these goals from a variety of perspectives. Or, it also means the technique to create strategies. Balanced Score Card.
Contents |
Overview
| PDCA Cycle |
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PDCA refers to the methodology and way of thinking with regard to all activities by individuals and organizations in the sequences of:
Which are repeated continuously. Nowadays, PDCA is introduced in a variety of management activities and has become the central point in the business process management. |
Instead of proposing strategic goals from a single perspective like "Increase Profit," for instance "Target sales is X million yen!", BSC defines goals from multiple perspectives and shows how to accomplish each of the goals by additionally considering, for example, the perspective of "employee training," such as "The number of qualification obtained by employees is X." It is desired that creation of BSC is done by following PDCA Cycle.
If the financial perspective of "how we can increase earnings" is the only consideration when setting strategy, businesses will be bogged down in short-term strategy decisions. Thus, corporate management techniques using BSC aim at establishing long-term competitive force by defining quantitative goals from multiple perspectives and conducting well-balanced evaluation and improvement. Typical four perspectives for strategy formulation are shown below.
- Finance
- Customer
- Process
- Learning
As shown below, goals defined from each perspective are eventually integrated into goals from Finance perspective, but it takes time to affect the goals from Finance perspective. In this sense, this is the strategy formulation emphasizing the long-term growth.
- Goals from Learning perspective are used to accomplish goals from Process perspective.
- Goals from Process perspective are used to accomplish goals from Customer perspective.
- Goals from Customer perspective are used to accomplish goals from Finance perspective.
History
- 1990: Nolan-Norton Laboratory in KPMG, a consultant company in the United States, carried out a research project to study a new performance measurement framework that would be compatible with the information society.
- 1992: Robert S. Kaplan, a professor at Harvard Business School, and David Norton, a business consultant, who had participated in the research project, published an article on the BSC concept in the Harvard Business Review and the concept took off from there.
- 2000: In "The Strategy-Focused Organization," Robert S. Kaplan proposed the Strategy Map (please refer to the example of a Strategy Map) as a tool for formulating consistent strategies among the four perspectives.
Creation of BSC
The procedure to create BSC is shown below.
- Decide which perspectives are used in addition to Finance perspective. Usually, "Customer," "Process," and "Learning," are used.
- Analyze As-is and To-be.
- Define goals from each perspective.
- By defining CSF and KPI, break down the goals into concrete actions.
- Finance Perspective
- Define goals in terms of how we will increase the earning and yield profits of shareholders. Typical KPIs are shown below.
- Customer Perspective
- Define goals in terms of how the relationship with customers is well established and maintained.
- Process Perspective
- Define goals in terms of how we can effectively execute business by utilizing hard assets and immaterial assets, such as equipments and technologies.
- Learning Perspective
- Define goals in terms of how we can create immaterial assets, such as skills of employees.
| What is Company Life Cycle? |
|---|
| A theory saying that a company in general goes through "Initial Phase," "Growth Phase," "Mature Phase," and "Decline Phase." |
Depending on which stage of the life cycle the company is in, appropriate goals in each perspective vary.
| Life Cycle | |||||||
|---|---|---|---|---|---|---|---|
| Initial Phase/Growth Phase | Mature Phase | Decline Phase | |||||
| Finance Perspective | Growth Rate in Sales and Profit | ROA,ROE,ROI | Capital Adequacy Ratio, Cash Flow | ||||
| Customer Perspective | # of Newly Obtained Customers, Market Share | Satisfaction Index of Products, Customer Retention Rate | Customer Royalty Index, Processing Time of Claim | ||||
| Process Perspective | Asset Turnover Ratio, Out-of-Stock Rate | System Downtime, Production Lead Time | Response Time, Equipment Utilization Ratio | ||||
| Learning Perspective | # of Qualifications Acquired, Annual Training, Training Time | Employee Retention Rate, Motivation Index | Cost for Training per Employee | ||||
Example of BSC
Although different BSC is considered in each company, here are some concrete examples.
| Strategic Goal (KGI) | CSF | KPI | Numeric Goal | Action Plan | |
|---|---|---|---|---|---|
| Finance Perspective | Increase in Profit Ratio Expansion of Customers | Reduction of Cost of Purchase/Manufacture Increase Added Value Establish Overseas Bases | Profit Ratio Gross Margin per Product Sales per Regison | 55% 30000 Yen 20％ UP | Increase In-house Production Ratio Increase in Commodification Ratio and Recycling Rate Establish 25 Foreign Business Partners |
| Customer Perspective | Increase Customer Satisfaction Expansion of Sales Opportunity of Partner Companies | Provision of Inventory Information via the Internet Inventory Management of Alliance Products Quality Evaluation Standard | # of Business Inquiry # of Repeated Orders Complaint Ratio | 100 Cases / Month 25 Cases / Month 3% | Launching Inventory Search Site Recruitment of Alliance Affiliate Companies Ranking of Products based on Standards |
| Process Perspective | Establishment of Model Factories | Inventory Management System Production System | Inventory Difference Ratio # of Manufactured Products per Employee Gross Production Margin per Employee | 0% 3 Products 1.5 Million | Inventory Management by Means of IC Chip Creation of Task Improvement List Introduction of Cost Management System per Department |
| Learning Perspective | Human Resource Development | Pay-per-performance System Training System | Bonus Amount Training Time Training Cost | 15% UP | Establishment of Office Environment with High Job Satisfaction Definition of Performance and a Way to Determine Salary Based on it |
Strategy Map
Strategy Map illustrates relationship between goals and issues and measures from the four perspectives of BSC, Finance, Customer, Process, and Learning. Usually, it is created with BSC. By using Strategy Map, we can grasp the overall image of the strategy. Strategy Map is indispensable to utilize BSC not only as an "achievement evaluation tool" but also a "management tool."
- Strategy Map helps business managers extract concrete goals from abstract goals. A strategy formulation tool.
- Strategy Map helps employees understand the company-wide goals and their own roles in the entire company. A consensus tool and motivation management tool.
Relation between BPM and BSC
One of the perspectives employed in BSC is
- Process Perspective
Goals are defined from business process perspective. BPM is considered as the management to achieve these goals. BPM breaks down goals formulated from Process Perspective in BSC into goals of individual processes.
BPM is more like a real-time management. However, when BSC is used together, it can also cover the future growth like improvement of employees' skills, which can not be included in the process.
Related Articles
References
| column A Simile for the BSC |
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| The manager is the pilot and creating the BSC is the equivalent of keeping an eye on all the instruments in the cockpit while flying the plane. To maintain a steady flight, the pilot must watch the different instruments for speed, altitude, wind speed and other factors, and make adjustments if conditions are unfavorable. It is important to know which instruments have an impact on the goal of flying the plane safely and to know what values to maintain for those instruments. -- lenton |
- Baransu Sukoakaado: Atarashii Keieishihyou Ni Yoru Kigyou Henkaku. [The Balance Scorecard: Corporate Innovation by means of New Management Indicators] Authors: Robert S. Kaplan, David P. Norton. Translator: Takeo Yoshikawa / Seisansei Shuppan
- Baransu Sukoakaado Kouchiku: Kiso Kara Unyou Made no Paafekuto Gaido. [Constructing the Balanced Scorecard: The Perfect Guide from Foundation to Operation] Author: Takeo Yoshikawa / Seisansei Shuppan
- MBA Management Book Editors: Graduate School of Management, Globis University / Diamond Inc.
