The Balanced Scorecard

Presented By:
Faraaz Nasir Hossain 19156
Md. Jubayer 19169
Sonjit Biswas 19184
Amimul Ehsan 19111

Outline of the Session
Module 1: Basics Of Balanced Scorecard
Module 2: Four perspectives of Balanced Scorecard
Module 3: Strategy and Balanced Scorecard
Module 5: BSC: Quality, Time and Theory Of Constraints
Module 4: Chemical Bank : Implementing the Balanced Scorecard

Module 1: Basics of Balanced Scorecard

The Balanced Scorecard
The Balanced Scorecard translates an organization’s mission and strategy into a comprehensive
set of performance measures that provides the framework for a strategic measurement and
management system (Kaplan and Norton,1996).
An approach to the provision of information to the management to assist with strategic policy
formulation and achievement. It emphasizes the need to provide the user with a set of information
which addresses all relevant areas of performance in an objective and unbiased fashion. The
information provided may include both financial and non-financial elements and cover areas such
as profitability, customer satisfaction, internal efficiency and innovation (Chartered Institute of
Management Accountants, 2005).
The Balanced Scorecard (BSC) was developed to communicate the multiple, linked objectives that
companies must achieve to compete on the basis of capabilities and innovation, not just tangible
physical assets (Kaplan and Atkinson, 2001).

Balanced Scorecard (BSC) is born from the rich history of measurement and serves the same purpose to
business as the timepiece served the ancient mariners.
 BSC attempts to move businesses from monitoring to measurement; from measurement to management
and from management to direction setting.
1. Monitoring: The art and science of observing employee behavior and coaching.
2. Measurement: The art and science of gauging, using numbers and metrics, performance to a task.
3. Management: The art and science of motivating, coaching, and enabling individuals and teams in the
achievement of an objective.
4. Direction setting: The art and science of discovering strategic directions that are unique and
differentiating in the marketplace, communicating this to all levels in the organization in the form that
they can identify and co-relate their day-to-day actions to the goals.

Direction Setting
Management
Measurement
Monitoring

The Balanced Scorecard As an Aid
 Balanced Scorecard offers a broad and overarching skin to the structural architecture of the
business. This helps to identify business blind spots.
 The strength of a resilient organization comes from its ability to change its strategic thrust and
reflect it in actions and corresponding performance measures. This connection between
strategy, strategic thrusts, and activities can be achieved using BSC.
 One of the greatest challenges that BSC solves is misalignment between the strategy and the
real work being performed. BSC avoids the strategic paradox in which the CEO thinks the
strategy is working in action when in actuality, the strategy and the real work, as defined by the
activities of the organization, are not working in concert.
 Balanced Scorecard framework focuses on uncovering the main nonfinancial drivers of the
business, along with the economics of the business. Balanced Scorecard shows the way to make
strategy actionable. As a framework for action, it can be updated and creates a renewable
methodology and framework.

Characteristics of Balanced Scorecard
Balances financial and non-financial measures
Balances short and long-term measures
Balances performance drivers (leading indicators) with outcome measures (lagging indicators)
Leads to strategic focus and organizational alignment.

The Building Blocks of BSC
Mission Statements
Vision Statements
Values
Strategy
Key Performance Indicator
Strategy Map
Measures Targets
Initiative
Outcomes

Mission Statement
Mission Statements: Mission statements are “enduring statements of purpose that distinguish one
business from other similar firms. A mission statement identifies the scope of a firm’s operations in
product and market terms”.
Mission statements live in almost every organization. While strategy is the unique way an
organization goes to market, mission defines the task at hand that the organization is assigned.
It addresses the basic question that faces all managers: “What is our business?”
A mission statement not only broadly charts the future direction of an organization but it also serves as a
constant reminder to its employees of why the organization exists and what the founders envisioned
when they put their fame and fortune (and names) at risk to breathe life into their dreams.
Missions are essential part of the Balanced Scorecard for organizations as they are important to the drive
of an organization.

Vision Statement
Vision Statement: “What We Want to Be”.
Vision is a dream or picture of the future that draws us—no pulls us into the future (Lucas, 1997).
It is the picture of what an organization believes the future can be. It details the world better for the use
of the organizations tools, products, and services. Vision statements show everyone what the world can
be.
Vision statements are:
Significantly motivating
A selling document
A communications tool used to solicit members and stakeholders
A driving dream of the way things can be

Values
• Values – “What’s Important to Us”.
• Values guide the entire process of objective setting, goal acquisition, and strategy deployment. In
fact, the key elements of mission, vision, and values drive the entire success of any organization.
• Values are ever changing and stand the test of time. They can sustain an organization or make it
extinct.
• Organizations have taken value statements to heart and have found that any endeavor it performs is
dependent on not just the end, but also the means to that end and values guide this value.
• values drive the how of business while the mission sets the target.

Strategy
“Know your enemy and
know yourself and you
can fight a hundred
battles without
disaster”.
- Art of War (Sun Tzu)

Strategy
Strategy: “The Game Plan”
“The strategy is not the consequence of planning but the opposite, its starting
point”(Mintzberg,1978).
The essence of strategy is the science and art of devising plans to win over customers and other
stakeholders.
Webster’s defines strategy as:
The science and art of employing the political, economic, psychological, and military forces of a
nation or a group of nations to afford the maximum support to adopted policies in peace and war.
The science and art of military command executed to meet the enemy in combat under
advantageous conditions.
A careful plan or method.
The art of devising or employing plans or stratagems toward a goal.

Strategy
Essential Elements of Strategy:
Sun Tzu states that if you know your enemy and yourself, then you can sustain a
hundred battles.
Three essential elements of strategy:
1. Know yourself
2. Know your enemy
3. Know the customers

Strategy
1. Know yourself:
Your unique attributes are displayed by what you do best.
Your strategic positioning is displayed by where you fit in the
marketplace in the minds of your customers and buyers.
Know the value that stakeholders will pay for.

Strategy
2. Know your enemy:
Understand their strengths and weaknesses
Know where they are headed and how they plan to take on the
market.
Know how their leadership thinks.
Know what they cannot change—that is, how they view their world,
their personality, the unique way in which they interact with
customers, the way they build products or services.

Strategy
3. Know your Customer:
Know what customers value disproportionately.
Understand the segments and details of where your future buyers
reside.
Recognize that customers are not companies, they are people within
these companies.
Users of your product are not necessarily the ones who pay for the
products.

KPI, Strategy Map, Measures, Targets, Initiative and
Outcome
Key Performance Indicator: Key Performance Indicators (KPIs) are the critical (key) indicators of
progress toward an intended result. KPIs provides a focus for strategic and operational improvement, create an
analytical basis for decision making and help focus attention on what matters most.
Strategy Map: The strategy map provides a framework that links both tangible and intangible assets to
shareholder value creation through four interrelated perspectives. It is a general, logical and comprehensive
architecture for describing the strategy framework.
Measures are used to track organizational performances.
Targets are the desired level of performance for each measure.
Initiative are projects that help reach one’s desired target.
Outcomes are the expected results an organization desires,

The Building Blocks of BSC
Mission – Why
We Exist
Vision – What
We Want to Be
Values – What’s
Important to Us
Strategy :
Our Game Plan
Strategy Map :
Translate the
Strategy
Balanced
Scorecard :
Measure and Focus
Strategic
Outcomes
Satisfied
Shareholders
Delighted Customers
Excellent Processes
Motivated Workforce

Module 2: Four perspectives of Balanced Scorecard

Four perspectives of Balanced Scorecard
The Balanced Scorecard consists of four interrelated quadrants, each containing
measures for a distinct perspective. These perspectives are:
1. Financial Perspective
2. Customer Perspective
3. Internal processes Perspective
4. learning and growth Perspective
These four perspectives are designed to cover the whole of the
organization's activities, both internally and externally, current and
future.

Four perspectives of Balanced Scorecard

Financial Perspective
• The financial perspective is a key factor of any performance measurement system
because an organization's financial performance is fundamental to its success.
• In for profit companies, the financial perspective is the main objective (ultimate
goal) – without having to sacrifice the interests of other relevant stakeholders
(community, environment, government, etc.)
• In the financial perspective, the strategic goal is the long-term shareholder value.
This goal is driven by two factors, namely : revenue growth and cost efficiency.

Long-term Shareholder
Value
Revenue Growth
Improve Cost Structure
Increase Asset Utilization
Cost Efficiency
Expand Revenue
Opportunities
Enhance Customer Value

The financial perspective addresses the following questions:
What are the financial targets?
What drives these targets?
What kind of profit and revenue to achieve?
In a nonprofit organization, what budget guides the organization?

Measures that are typically used in this perspective are:
For-Profit Companies Not for-Profit Companies
 Revenue
 Profit margin
 Gross margin
 Cost of goods sold
 Cost of services
 Expense targets
 Risk adjusted return on capital
 Cash flow
 Debt to equity ratio
 EBITDA
 Earnings
 Budget shortfalls
 Expense targets
 Allocation from donors
 Allocation from legislatures
 Cost to deliver service
 Tax dollars/county

Customer Perspective
This perspective is very instrumental, because without customers, how can a company
survive?
In the customer perspective of the BSC, managers identify the customer and market
segments in which the business unit will compete and the measures of the business unit’s
performance in these targeted segments.
Often, the customer perspective is viewed as the set of objectives the organization must
achieve to gain customer acquisition, acceptance, and perpetuation.
Customer perspective covers the following strategic objectives:
1. Customer acquisition
2. Customer retention
3. Customer profitability
4. Market share
5. Customer satisfaction

Price Availability BrandServiceQuality
Customer Acquisition
Customer Satisfaction
Customer Retention Customer Profitability
Market Share

The Customer perspective addresses the following questions:
What is your target market?
Who are/is your customer(s)?
Who do they call our customers?
Who do I compete against to gain the customer?
What value does the existing customer of the organization perceive?
If the organization disappeared, who would miss us? What will they
do?

Often, the customers of today may not be the desired customers of tomorrow. As the audience of
customers mature, what they desire in the organization changes also. What do your customers
value?
Value proposition is the emotional, physical and symbolic residue derived by a customer once this
individual or organization purchases the product or service for a price. Value Proposition makes a
strategy truly unique
Three common value proposition attributes are:
1. Product and service attributes
2. Customer Relationship
3. Image and reputation
Using Balanced Scorecard unique value propositions can be linked to core outcome measures.

Customer Perspective: Linking Unique Value Propositions to Core Outcome Measures

Sample Customer Perspective Measures Are:
• Brand equity measures
• Market share
• Share of mind
• Total available market
• Total accessible market
• Customer retention
• Customer satisfaction
• Customer attrition
• Average selling price
• Lifetime value of customer
• Sales per employee
• Customer profitability by channel by product
• Design win (number of wins per year)

Internal processes Perspective
 In the internal business process perspective, executives identify the critical internal processes in which the organization must
excel.
 The critical internal business processes enable the business unit to:
1. Deliver the value propositions that will attract and retain customers in targeted market segments.
2. Satisfy shareholder expectations of excellent financial returns.
 This perspective reflects the processes in key business that should be optimized in order to meet the needs of the customers.
 The internal business process measures are focused on the internal process that will have the greatest impact on customer
satisfaction and achieving the organization’s financial objectives.
 There are four main strategic objectives in this perspective, namely:
1. Innovation Process
2. Operation Process
3. Post sales services
• Customer Management Process
• Regulatory and Social process

Processes that
create new
products and
services
• New Ideas
• R&D Portfolio
• Design/ Develop
• Launch
•Identify Market
Innovation
Processes
Processes that
improve
communities and
the environment
• Environment
• Safety & Health
• Employment
• Community
Regulatory
and Social
Processes
Processes that
produce and
deliver products
and services
• Supply
• Production
• Distribution
Operations
Management
Processes
Processes that
enhance customer
value
• Selection
• Acquisition
• Retention
• Growth
Customer
Management
Processes

Common Internal business process perspective measures include:
• Patents filed in engineering
• Product lifecycle measures:
1. Mean time between failures of existing products
2. Spec to prototype cycle
3. Bug-count on release
4. Weighted defect count
• Activity-based costs of major contributing activities and outputs
• Inventory turns
• Number of new products in pipeline
• R&D pipeline for new products
• Number of returns
• Percentage claims ratio (insurance company)

Learning and Growth Perspective
This perspective shows us that good human resource development system, organizational system
and information system forms a solid foundation for improving company performance.
This perspective includes staff training and attitudes to organizational culture related to both
individual and corporate self-improvement. This quadrant recognizes that in a knowledge worker
organization, people are the greatest resource. Kaplan and Norton focus upon the fact that 'learning'
is more than 'training'.
This perspective reflects the capability that a company should have, namely:
1. Human Capital
2. Organization Capital
3. Information Capital

Human Capital Organization Capital Information Capital
• Skills
• Knowledge
• Attitude
• Systems
• Database
• Networks
• Culture
• Leadership
• Organization Development

Common metrics in this perspective measures include:
• Training by level
• Retention numbers
• Redeployment percent
• Forced and unforced attrition
• One-on-one interviews per employee
• Employee and vendor satisfaction
• Pay benchmarks
• Rankings
• Six-month performance after hire
• Promotion from within
• Personal development plan creation

Sample Goals Using Four Perspectives
The following table shows hypothesized list of goals or strategic themes for a for-profit emerging
organization serving the utility industry.

The Four perspectives Combined
The Four perspectives of BSC
together translates Vision and
Strategy for the organization to
implement.

Harmonizes the use of both
financial and non-financial
resources of an organization.

“Cascading” strategy from top level
to all levels of an organization.

“Cascading” performance measures utilizing the Balanced Scorecard
methodology.
This process should be viewed as a communication process rather
than a method of control.
Obviously, the exact way that measures will flow down through the
organization will be partially dependent on the specific nature of the
corporate hierarchy.

There are a number of key considerations for successfully cascading a company-wide Balanced Scorecard
capability throughout an organization:
 Each organization should go through a process of creating a corporate vision, themes, objectives,
and measures
 Vision, themes, objectives, and measures should cascade into the organization (that is, Corporate to
Division to Business Unit)
 The Balanced Scorecard should stop at the point where strategy is no longer articulated
 The best possible measures for monitoring the strategic measures of each organization, division, or
business unit should be identified

Since the process of cascading strategy down through the organization is such a fundamental element of
the Balanced Scorecard process, organizations must ensure that they have a recurring process in place at
each level to enable it.

The Four perspectives: Are they sufficient?
 The four perspective of the Balanced Scorecard should be considered a template, not a straitjacket.
 No mathematical theorem exists that justify that the four perspectives are both necessary and
sufficient.
 Companies rarely use fewer than four perspectives, but depending on industry circumstances and a
business unit’s strategy, one or more additional perspectives may be needed.

Module 3: Strategy and Balanced Scorecard

Strategic Paradox
There are two forms of strategic paradox in strategy formulation and execution:
 Mistakenly viewing strategy as operational effectiveness.
 Mistakenly assuming that strategy and actions in an organization are always aligned.
According to Professor Michael Porter, operational effectiveness is performing similar activities better than
rivals, while strategic positioning is performing different activities or performing similar activities
differently.
When organizations do anything that appears to be a competitive advantage using operational effectiveness,
others often follow.
“The trouble with forging a highway is that if you are right, imitators will follow. Then you are back into
protecting your base and become subject to conventional wisdom.” (Kim and Mauborgne,2005).
Professor Porter emphasizes that benchmarking only makes companies similar. Porter emphasizes the value
of strategic positioning over operational effectiveness.

Strategic Paradox
• Strategy formulated with no regard to strengths and weaknesses in capability is blind strategy. The
true power of strategy can only be expressed in work performed.
• The real challenge seems to be, not only strategy formulation, but also the ability to create an
operational framework to execute the strategy.
• The business world is guided by change. And change can affect business models drastically.
• Sticking to a good looking strategy when strategic variables change can be dangerous. For companies to
be effective, they must have as much ability to change their strategy as to formulate one.
• Strategy without strategic alignment to key organizational activities renders organizations impotent.
• The strength of a resilient organization comes from its ability to change its strategic thrust and reflect it
in actions and corresponding performance measures.

Strategic Paradox
• A Paradox Map compares where resources should be emphasized to achieve the strategy of the
company against what work is currently being performed.
Paradox Map
Leader in direct consumer marketing
Align with larger player Dominate in customer service
Emphasis as per executive leadership impression and
direction
Real emphasis of resources

Avoiding Strategic Paradox
To Avoid such strategic paradoxes actions of companies must
be aligned with strategies developed.
BSC avoids the strategic paradox by linking overall strategy to
daily activities of an organization.
Balanced Scorecard functions as a bridge between strategy and
it’s implementation.

Where does the BSC fit?
Balanced Scorecard bridges the gap between strategy and it’s
implementation.

Linking BSC to a Single Strategy
The multiple measures on a properly constructed Balanced Scorecard should consist of a linked
series of objectives and measures that are both consistent and mutually reinforcing.
Balanced Scorecard should be viewed as an instrumentation for a single strategy.
The integrated system of scorecard measures should incorporate the complex set of cause-and-effect
relationships among the critical variables- including leads, lags and feedback loops- that describe the
trajectory, the flight plan of the strategy.
Two important elements:
1. Cause-and-effect Relationships
2. Performance Drivers

Cause-and-effect Relationship
 When trying to understand anything complex, we tend to break ideas into their contributing parts. In
computer science, the breaking of tasks down to smaller compositions is called structured
decomposition.
 At Intel corporation, for example, complex tasks are broken down into objectives and key results so
that every team member can understand the things to do, their owners, and what the results of the
objectives are.
 A strategy is a set of hypotheses about cause and effect.
 The measurement system should make the relationships (hypotheses) among objectives (and
measures) in the various perspectives explicit so that they can be managed and validated.
 The chain of cause and effect should pervade all four perspectives of a balanced scorecard.
 A properly constructed Balanced Scorecard should tell the story of the business unit’s strategy. It
should identify and make explicit the sequence of hypotheses about the cause-and-effect
relationships between outcome measures and the performance drivers of those outcomes.

Cause-and-effect Relationship
Four perspectives of Balanced Scorecard:
1. Financial perspective [Return on capital employed/Economic value added]
2. Customer perspective [Customer loyalty]
[On-time delivery]
3. Internal business process perspective [Process quality, Process cycle time]
4. Learning and growth perspective [Employee skills]

Strategy Mapping
 With Balanced Scorecard, the art of understanding the relationship among all key perspectives is
done using strategy mapping—a technique of drawing the intricate relationships of cause and effect
among all perspectives and their contributing parts.
 A Strategy Map is a generic format for describing strategy in concrete terms.
 Strategy mapping is a tool created by Balanced Scorecard (BSC) pioneers Robert S Kaplan and
David P Norton. It allows organizations to describe and communicate their strategies. Strategy maps
also serve as an appropriate basis for the development of financial and non-financial Balanced
Scorecard measures that can be used to monitor strategy execution and performance.
 The Strategy Mapping methodology translates high-level strategic vision into measures, and ensures
alignment of objectives throughout the organization.
 Strategy maps can be used as a standalone tool to depict an organization's strategy. However, their
real value is when they are used as part of a systematic strategic management process that aligns
organizational and individual targets and initiatives with a defined mission and desired strategic
outcomes.

Strategy Mapping
 Strategy Maps begin with several explicit strategic themes and then breaks these themes down into a
series of tactical objectives. Each of these objectives is mapped to both a strategic theme and a
Scorecard perspective (for example, customer, financial, process, learning and growth). Each of the
objectives on the Strategy Map is related to each other in a web of cause and effect relationships.
This creates a coherent and holistic view of the tactical objectives needed to support the strategic
themes. Each tactical objective then has a measure (or measures) assigned to it and this populates the
performance measures found in the Balanced Scorecard.
 The use of the Strategy Map can be a very powerful tool enabling managers to work through which
performance measures actually support their stated strategy and therefore should form the basis for
their Balanced Scorecard. It also ensures that performance measures selected are complementary to
each other via cause and effect relationships.
 The creation of Strategy Maps guards against many managers’ automatic inclinations to populate
their Scorecards with a hodgepodge of existing measures. The Balanced Scorecard is not a
repository for a selection of existing key performance indicators. It is a focused instrument to plan,
measure, and track the successful execution of strategy. The rigorous use of Strategy Maps is a key
technique in accomplishing this.

Strategy Mapping
 Strategy Mapping is a Six-Step Process. The steps are:
1. Specify an overriding objective.
2. Choose the value proposition.
3. Choose the financial strategies.
4. Choose the customer strategies.
5. Execute through the internal perspective strategies.
6. Plan the learning and growth strategies.
 Steps 1 through 4 of the strategy mapping process address the question, “What do we want to
accomplish?”
 Steps 5 and 6 address the question, “How do we plan to accomplish our objectives?”

Strategy Mapping
The major strategies for the organizational unit are listed across the top
while the various Balanced Scorecard perspectives are listed along the
left hand side. This creates two of the essential elements of a successful
Strategy Map: the explicit formulation of strategy and the use of
multiple perspectives. In order to actually construct the map, managers
must work through a cause and effect chain that originates from the
strategic themes and flows through each of the tactical strategic
objectives that support it. Each tactical objective in turn has at least one
performance measure assigned to it.

Performance Drivers
 A good balanced scorecard should also have a mix of outcome measures and performance
measures. Outcome measures without performance drivers do not communicate how the
outcomes are to be achieved. They also do not provide an early indication about whether the
strategy is being implemented successfully.
 Conversely, performance drivers alone without outcome measures may enable the business unit
to achieve short term operational improvements. But they will fail to reveal whether the
operational improvements have been translated into expanded business with existing and new
customers and eventually, into enhanced financial performance.
 A good balanced scorecard should have an appropriate mix of outcome and performance drivers
of the business unit’s strategy. In this way, the scorecard translates the business unit’s strategy
into a linked set of measures that define both the long term strategic objectives and the
mechanisms for achieving those objectives.

Module 4: Chemical Bank : Implementing the Balanced
Scorecard

Case Analysis: Chemical Bank : Implementing
the Balanced Scorecard
The restructuring of Chemical Bank with the merger of Chemical Bank and the Manufacturers Hanover
Corporation has transformed the processes in which the company’s strategies are implemented. In order to
create the shareholders value (or profits), the company must seek to increase revenue and reduce
expenses through various perspectives: financial, customer, internal-process, and learning-and-growth.
With the help of these perspectives, the company can create the balanced score card (BSC) and have a deeper
understanding of its strategies in both financial and nonfinancial aspects. The BSC translates an
organizations mission and strategy into a set of performance measures that provides the framework
for implementing its strategy. It adds three perspectives: customer, business-process, and learning-and-
growth to the traditional financial perspective. The financial perspective may help a company ensure
whether short-term goals are satisfied, but it is not enough to capture the entire process. Thus, the other
perspectives are included to provide nonfinancial objectives. These objectives are used to measure the
processes and results of each manager’s performance, and decision rights are then allocated accordingly
using drivers and responsibility centers. Another reason for the BSC implementation is to tie compensation to
the nonfinancial aspects as well as the financial aspects to encompass the performance factors over which
managers have control.
 Klein, S. K. (1995). Chemical bank: Implementing the balanced scorecard. Harvard Business Review .
 Prakash (2017). A study on chemical bank case: implementing the balanced scorecard

Why does Chemical’s Retail Bank, a financial institution with the bulk of its inputs
and outputs denominated in financial terms, need measures other than
financial to motivate and evaluate its performance?
Retail banking has emphasized efficient collections and processing of deposits. The services bank
provided were very limited. However, the customers’ preference and demand have changed, requiring
banks to provide broader product and service line. For that reasons, Chemical’s Retail Bank should
find ways to develop new relationships with its customers. It must shift its image from a provider of
a narrow set of banking service to becoming a financial advisor and service provider for targeted
customer groups. Because of this complex competitive market, nonfinancial BSC measures are more
suitable for Chemical’s Retail Bank. It can help manager track and motive performance of all levels of
the company easily.
However financial lacks of specific objectives and cannot reflect business strategy in this new
competitive environment in the long run, and it is not a good way to motivate and evaluate the
performance of Chemical’s Retail Bank. When the bank uses measures other than financial to motivate
and evaluate its performance, it will be more efficient because of specific objectives and management
system, which help The Chemical implement customer-centered strategy.

What does Mike Hegarty want to accomplish
with the BSC?
At year-end 1991, the process had begun with the merger of Chemical Bank and the Manufacturers Hanover
Corporation. Before this merger, Michael Hegarty was head of the Retail Bank Division of Chemical Banking
Corporation. He was overseeing this transformation.
He realized that companies would face more competitors and changes in the future. By using Balanced
Scorecard, Michael Hegarty wanted to transform the bank into a market-focused organization that would be
the financial service provider of choice to targeted customer groups successfully.
His company was facing business culture combination, means two companies, which have different business
objectives and management methods need to work together, he wanted to use Balanced Scorecard to soften
these changes.
The BSC can help all levels of the company better understand the key drivers of the business. The
performance of the company will be tracked easily and specifically. By using the BSC, Mike Hegarty
wanted the company adapts and innovates to ensure success in this competitive market and achieves the
planned objectives.

Comment on the BSC implementation process at Chemical’s Retail
Bank . What are the enabling conditions for a successful BSC project?
A very important part of the BSC is the managers outside the top level of the organization
implementing the BSC. The Chemical Bank did well consulting with managers during the building of
the initial BSC. This is key in the success of the initial implementation of a BSC. Unfortunately
Chemical Bank did not directly distribute their BSC to all of their employees, which is an
essential step to full utilization of a BSC. Everyone working at a corporation knows that the goal is
to increase revenue. Even without the completed measurement metrics, the employees still need to
know why they are being instructed in different methods in order to see the big picture clearly. Due to
this potential misunderstanding, employees may not have the full understanding of the implications of
new actions that the BSC generates for revenue generation and lead to these increased revenues.
This is a perfect example of employees needing to know why they are being told to do something and
why the BSC needs to be fully known by all employees. Although it would be ideal to sell the
employees on the BSC, management was able to motivate the sales force without the big picture by
getting them to first realize they were serious and then secondly by backing this up with real results.

Questions to be addressed:
(a) Name and evaluate the major strategic themes of the BSC at Chemical’s Retail Bank.
(b) Classify the strategic objectives according to the strategic themes.

(a) Name and evaluate the major strategic themes of the BSC at
Chemical’s Retail Bank.
Answer: The Chemical Bank has identified three core strategic ideas from their former strategies,
which are shifting the customer/profit mix, improving productivity, and enable the
organization. Shifting the customer mix will lead to better profit mix and this change
would be brought on by the training initiatives for employees as well as better
understanding of customer segments. Resulting from these efforts will also allow time to
be used more productively as a result of new efficiency from training. All of these are
enabling factors for the organization.

Answer: Items that fall under each heading are strategic objectives with each item is a specific
action point in which improvement of each item will lead to one of the strategic themes which
constitute the BSC
(b) Classify the strategic objectives according to the strategic themes.

Vision &
Strategy
Make the market
Create the product
Distribute & service
Differentiators
Essentials
Strategic information assets
Re-skilling
Accountability & reward linkage
Focus our resources
Return on spending
Reduce cost
Increase revenue
Reduce risk
FINANCIAL
INTERNAL
BUSINESS
PROCESS
LEARNING &
GROWTH
CUSTOMER
OVERVIEW OF BALANCED SCORECARD

Provide a detailed evaluation of the strategy maps of
the BSC at Chemical Bank.
The various strategy maps are all tied and linked together to contribute to a better understanding and fulfillment of
the company vision. With regards to finance, chemical bank’s BSC illustrates that the objective is to improve
the profitability of the bank while at the same time keeping the risk factor relatively low. This is done by
following the various trends in the market and adapting various products and finance strategies towards that
objective. The managers were smart enough to notice the various segments that were forming in the customer-based
market and decided to focus on a number of them in order to get competitive advantage in these markets.
These market segments are the result of changing trends in the way customers want to carry their financial
activities as well as their needs and as a result, the bank had to develop a strategy whereby it develops more
products with varying characteristics in order to satisfy each segment and fully fulfill their needs. Internally,
the focus which used to be directed solely towards sale activities has been directed now towards research and
innovation too as a result of the new strategy in place. The aim is to study the market and better understand the
customer in order to deliver them the best product in the best way possible. And this is tied to the learning and
growth objectives on the balance scorecard where it would be necessary to provide all staff new training and
guide them towards the new strategy being put in place so the staff can better focus on said strategy to foster
growth in the company.

What are the strengths and weaknesses of the BSC
built at the bank?
The BSC built at the bank had a number of strengths, one of them being the fact that it forced the bank to examine itself
in a more competitive market. It more specifically provided a more cohesive strategy with the manufacturers at
Hanover Corporation given the merger that had recently occurred. As pointed out by the head of the bank, the BSC
helped improve communication and reinforce strategy when dealing with the large staff of about 8000 people at the
bank. It gave everyone measures that needed to be followed rigorously in order to boost performance while at the
same time clarifying and communicating the overall vision of the bank. The BSC emphasized focus on some essential
measures and strategic objectives such as quality delivery of products and services to customers. In addition, it helped
develop a cause-effect relationship between objectives and measures, which to management in particular, is very
beneficial and facilitates achieving strategic aims.
However there are some weaknesses to also denounce. While the scorecard was good in theory and clearly laid out, it
was not reviewed adequately, had not been implemented correctly, and employees were not familiar with it. Under said
scorecard, customer representatives had to expand their skills in order to better advice the customers. However, this also
carried a requirement, which was for the BSC to be properly communicated to the representatives, which was not done.
The BSC, in fact, was only being experienced by 27 top-level managers. Clearly, this was a weakness in the scorecard
and had to change. Indeed, they experienced problems with a number of their measures, such as customer retention.
Clearly, the objectives, which had been well defined under the various perspectives, would suffer.

Why Balanced Scorecards Sometimes Fail ?
While the Balanced Scorecard is an important tool for management to help in long term strategy, there are a few common
pitfalls that should be avoided. The three most prevalent pitfalls are: identifying goals and drivers that are not actionable
or critical, top management has to be committed to see the BSC being successful and the BSC has to be communicated
throughout the organization from top to bottom. A common mistake in BSC implementation is identifying measures that
cannot be acted upon. Some of these measures are too broad or do not reach the heart of the issue. Lee Wilson describes a
situation at Chemical Bank demonstrating this problem. One of the large goals of the company was to have quality customer
service. However, their internal measure that aggregated customer service data only alerted the company of the customer
service issue without describing why or how to fix it.
Another common pitfall for the BSC project is not having a management team being fully committed to seeing the
Balanced scorecard succeed. At the end of the day, “measures don’t manage”, and a company needs to have management
that will commit to seeing the BSC succeed.
The last pitfall companies fall into when implementing the BSC is failing to effectively communicate the strategy
throughout the company down to every last employee. By knowing the common pitfalls, companies can work to avoid
them and use the balanced scorecard in the way it was intended, and yield impressive results.
 Murby & Gould (2005) . Effective performance management with the balanced scorecard, The chartered institute of management accounting

RELATIONSHIP OF BSC TO OTHER ORGANIZATIONAL
IMPROVEMENT INITIATIVES:
The BSC emerged in the 1990s just as two other approaches—activity-based costing and shareholder
value management—were being advocated as measurement systems to help managers improve
organizational performance. The three approaches do not compete with each other; in fact they are
highly compatible and while each can be implemented independently of the others, organizations will
get the greatest benefit from integrating all three.
Shareholder Value Management:
Within the financial perspective of the BSC, the shareholder value metric is decomposed into the sub-objectives
of cost reduction, improved asset productivity, and revenue growth. Customer objectives define the strategy for
revenue growth. It also helps executives manage the trade-offs between short term productivity improvements
and long-term sustainable revenue growth.

Activity-Based Costing
Activity-based costing (ABC) was developed to correct another defect in financial systems—the
inability of traditional costing systems to identify the drivers of indirect and support costs.
• Operational Linkage The first linkage between ABC and the BSC occurs in the operational measures
of the BSC’s internal process perspective. Three parameters—cost, quality, and time—usually define
the operating performance of any process.
• Customer Profitability Linkage A second linkage occurs when an ABC model is used to measure the
profitability of individual customers (Kaplan and Cooper 1998, Chapter 10). The BSC customer
perspective typically includes customer outcome measures such as acquisition, satisfaction, retention,
account share, and market share.
• Budgeting Linkage A third linkage arises when the ABC model is used for activity-based budgeting:
With the BSC providing the management process for defining the strategic budget, and activity-based
budgeting used to develop the operational budget. managers have powerful analytic tools for their
budgeting processes.

• Total Quality Management
Many companies also engage in quality initiatives. The causal linkages in a BSC strategy map enhance
quality programs by articulating the two ways that process improvements can link to strategic outcomes.
First, quality improvements in the internal perspective should improve one or more outcome measures in
the customer perspective; second, quality improvements can lead to cost reduction, an outcome in the
financial perspective. The BSC enables managers to describe how they expect to translate quality
improvements into higher revenues, fewer assets, less people, and lower spending.
 Kaplan and Norton ( 2001) Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part II 157, Accounting Horizons Vol. 15
No. 2 pp. 147–160

Module 5: BSC: Quality, Time and Theory Of Constraints

This module describes how a balanced scorecard approach helps managers and
management accountants improve quality, customer-response time, and throughput.
This module will be presented in three parts :
Part One : Quality as a competitive tool
Part Two : Time as a competitive tool
Part Three : Theory of constraints and Throughput contribution analysis

Big Picture
Quality as a Competitive
Tool
Time as a Competitive
Tool
Theory of constraints &
Bottleneck Operation
Throughput contribution
Financial measures
Customer measures
Internal Business process
measures
Learning and growth
measures

Two Basic Aspects of Quality
Design quality—refers to how closely the characteristics of a product or service meet the needs and
wants ofcustomers
Conformance quality—refers to the performance of a product or service relative to its design and product
specifications
Part One: Quality as a Competitive Tool

Quality and Failure
Actual
Performance
Design
Specifications
Customer
Satisfaction
Conformance
Quality
Failure
Design
Quality
Failure
Quality as a Competitive Tool

Costs of Quality
Prevention costs—costs incurred to preclude the production of products that do not conform to
specifications
Appraisal costs—costs incurred to detect which of the individual units of products do not conform to
specifications
Internal failure costs—costs incurred on defective products before they are shipped to customers
External failure costs—costs incurred on defective products after they have been shipped to
customers
Quality as a Competitive Tool

Exercise: 19-16 (Cost of quality)
(From Horngren)
Costen Inc., produces cell phone equipment. Jessica Tolmy, Costen’s
president, decided to devote more resources to the improvement of
product quality after learning that her company had been ranked fourth
in product quality in a 2008 survey of cell phone users. Costen’s quality-
improvement program has now been in operation for two years, and the
report shown here has recently been issued.

Required:
 For each period, calculate the ratio of each COQ category to
revenues and to total quality cost.
 Based on the results of requirement 1, would you conclude
that Costen’s quality program has been successful? Prepare a
short report to present your case.

Part Two: Time as a Competitive Tool
 Customer response time and on time performance
 Time drivers and costs of time
 Relevant revenues and costs of time

Customer response time and on time performance:
Customer response time is how long it takes from the time a customer places an order for a
product or service to the time the product or service is delivered to the customer.
 Receipt time
 Manufacturing cycle time
 Delivery time
Manufacturing cycle efficiency (MCE) is an important measure of internal business process performance.
Performance measures are found on the balanced scorecards of the companies as we know.
MCE = (Value-added manufacturing time / Manufacturing cycle time)
Or,
MCE = (Value-added time / Throughput time)
Time as a Competitive Tool

On-time performance is delivery of a product or service by the time it is
scheduled to be delivered.
For example, commercial airlines gain loyal passengers as a result of consistent
on-time service. But there is a trade-off between a customer’s desire for shorter
customer-response time and better on-time performance.

Time drivers and costs of time:
A time driver is any factor that causes a change in the speed of an activity when the
factor changes.
Uncertainty and bottlenecks as drivers of time
 Uncertainty about when customers will order products or services
 Bottlenecks due to limited capacity
Relevant revenues and Costs of time:
Revenues are affected because customers are willing to pay a higher price for faster
delivery.

Exercise: 19-20(From Horngren)
(Quality improvement, relevant costs, relevant revenues)
TechnoPrint manufactures and sells 20000 high
technology printing presses each year. The variable
and fixed costs of rework and repair are as follows :

Additional Information:
TechnoPrint’s current presses have a quality problem that causes variations in the shade of colors. Its
engineers suggest changing a key component in each press. The new component will cost $55 more
than the old one. In the next year, however, TechnoPrint expects that with the new component it will:
1. Save 12,875 hours of rework,
2. Save 9,000 hours of customers,
3. Move 200 fewer loads,
4. Save 7,000 hours warranty repairs, and
5. Sell an additional 150 printing presses, for a total contribution margin of $18,00,000.
TechnoPrint believes that even as it improves quality, it will not be able to save any of the fixed costs of
rework or repairs. TechnoPrint uses a one year time horizon for this decision, because it plans to
introduce a new press at the end of the year.

Required :
1. Should TechnoPrint change to the new component?
2. Suppose the estimate of 150 additional printing presses sold is uncertain, what is the
minimum number of additional printing presses that TechnoPrint needs to sell to
justify adopting the new component?

Part- Three
Theory of Constraints (TOC)
Throughput contribution analysis (TCA)

Managers use cost accounting to help make decisions to reduce a company’s costs and improve
profitability. By eliminating bottlenecks, theory of constraints increases the velocity of products
moving through an organization and therefore profit is maximized.
For the sake of completeness, it should be noted that the theory of constraints and throughput-
contribution analysis is NOT the only approach used in decision making. Other methods are:
I. standard cost accounting
II. activity based costing
III. marginal costing.
Big Picture

Big Picture (Cont.)
Theory of constraints
Throughput
contribution
Bottleneck operation
Financial measures
Customer measures
Internal Business
process measures
Learning and growth
measures

Definition: theory of constraints
• CIMA Official Terminology (2005) ‘A technique where the primary goal is to maximize throughput
while simultaneously maintaining or decreasing inventory and operating costs.’
• The Theory of Constraints is a management discipline which provides the determination of the
factors which hinders accompany reaching its objectives and the application of necessary changes to
remove these factors.
• Theory of constraints is NOT ‘costing’ method as it does not allocate costs to products and services.
The TOC approach calculates the product throughput as the product’s sales price minus its material
costs. All other costs are taken into account separately as operating costs and are not allocated
directly to the products

“A system is strong as
its weakest link”

• "a chain is no stronger than its weakest link“
• Improving strong links, does not strength the chain.
• To achieve more of your goal, improve your weakest link.
Definition: theory of constraints (Cont.)

Why: theory of constraints
• Improve flow time of product or service through the system
• Increase throughput
• Reduce variation, improve quality
• Low-disruption, sustainable way to change

Examples: management problems
• company’s market is shrinking
• losing market to competitors
• can not get the right people
• cannot produce enough
• delivers too late
• company’s performance is insufficient
• departments do not co-operate

Examples: Underlying problems
• Company is not working toward its goals
• Company can not communicate goals to stakeholders (i. e., customers,
staffs, investors)
• Without goals: decline and fall

Assumptions: theory of constraints
Increasing
throughput
Minimizing
inventory
Decreasing
operating expense
– Better Product
–Lower Price
–Responsiveness to Customer needs

Applications: theory of constraints
There are various applications of TOC:
• Operations
• Finance and accounting
• Project management
• Marketing and sales

Steps: theory of constraints
The TOC process seeks to identify the constraint and restructure the rest of the
organization around it, through the use of the Five Focusing Steps:
1. Identify the Constraint
2. Exploit the Constraint
3. Sub ordinate everything to
the Constraint
4. Elevate the Constraint
5. Repeat for the new Constraint

Drawbacks: theory of constraints
Specific criticisms have been leveled at TOC and TCA and are discussed below:
• They are short-term decision tools.
• They may only be valid concepts if applied to the totality of the supply chain including
management, production, resources and support
• Dependent on circumstances, operating expenses under TOC are regarded as fixed,
which is simplistic in the view of detractors. Therefore TOC is basically the same thing
as variable costing

Vs.
Bottleneck
A bottleneck is any resource
with a capacity equal to or
less than the demand placed
upon it
Constraints
A constraint is anything that
limits a system’s performance,
relative to the system goal

AA-110 B-80 C-120
D-120
E-60 F-190
Daily Demand-100 Units
Bottleneck
Bottleneck
Constraints

Note the cause-and-effect linkages across the measures of Balanced Scorecard :
Better employee training (Learning-and-growth-measure) leads to better management
of bottleneck operations (Internal-business-process- measure), which in turn leads to
better customer response times (Customer measure) and finally it leads to higher
revenues ( Financial measure).
Bottleneck and Balanced scorecard

 Bottleneck Operation :
Bottlenecks determine the throughput of a supply chain.
Recognizing this fact and making improvements will increase
cash flow. A bottleneck in a supply chain means the resource
that requires the longest time in operations of the supply chain
for certain demand.

Four Steps in Managing Bottleneck Operations
1.Recognize that the bottleneck operation determines throughput contribution of the entire system.
2.Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be
worked on.
3.Keep the bottleneck operation busy and subordinate all nonbottleneck operations to the bottleneck
operation.
4.Take actions to increase the efficiency and capacity of the bottleneck operation. The objective is to
increase the difference between throughput contribution and the incremental costs of increasing efficiency
and capacity.

Methods to Relieve Bottlenecks
• Eliminate idle time at the bottleneck operation.
• Process only those parts or products that increase throughput contribution, not parts or
products that will remain in finished goods or spare parts inventories.
• Shift products that do not have to be made on the bottleneck operation to
nonbottleneck processes, or to outside processing facilities.
• Reduce setup time and processing time at bottleneck operations.
• Improve the quality of parts or products manufactured at the bottleneck operation.

What is 'Throughput'
Throughput is the amount of a product or service a company can produce
and deliver to a client in a specific period of time. Businesses with high
throughput levels can take market share away from lower
throughput firms, because they can produce that product or service more
efficiently than their competitors
Breaking Down 'Throughput‘
The idea of throughput is part of the theory of constraints in business
management. The guiding ideology of the theory of constraints is that a
chain is only as strong as its weakest link. Advocates of the theory
attempt to minimize how weak links affect a company's performance.
Financial Perspectives: Throughput Contribution
Analysis

Throughput Contribution = Revenues – Direct Material COGS
Manufacturing Cycle Efficiency * Process Productivity * Process Quality Yield
=
Throughput
Manufacturing Cycle Efficiency = Value-added processing time / Total time
Process Productivity = Total units / Value-added processing time
Process Quality Yield = Good units / Total units
Therefore,
Throughput = Good units / Total time
Throughput Contribution Analysis (Cont.)

• Founded in :1970
• Company Type : Manufacturing
• Product : Semiconductor, Fiber
Optic, Fiber Cable.
Case Study:
theory of constraints

1.How Lucent become more productive ?
2.How Lucent improve their performance ?
3.How Lucent can Increase their profit ?
The Problems
Case Study of Lucent Technologies
Bell Labs Innovations

TOC Implementation

Step 2: Squeeze or exploit the constraint
Some options: to exploit
• Shield them from interruptions.
• Limit their WIP.
• Reduce their non value add work.

Step 3: Subordinate to the constraint
“Remove all excessive WIP”

Step 3: Subordinate to the constraint
Some options: to subordinate
• Limit WIP of upstream to match.
• Upstream do preparation work.
• Upstream improve their quality.
• Pair upstream with constraint staff.

Step 4: Elevate the constraint
Some options: to elevate the
constraints
• Improve their tools.
• Improve their environment.
• Improve their team work.
• Hire more people.

1. Identify the constraint
2. Exploit the constraint
3. Subordinate all else
4. Elevate the constraint
5. Repeat
Five Focusing Steps: theory of constraints
Get the most out of the constraint,
with only minor changes.
Major changes to the constraint,
Including increasing capacity.

After Implementing TOC
Throughput from : 10 / Day
Become : 14 / Day

TOC Result “Lucent”
1.The Product can developed twice Fast
2.The Project can be completed on time
3.Increase in profit

Advanced Management Accounting, Third Edition, Robert S. Kaplan and Anthony A.
Atkinson.
Cost Accounting: A Managerial Emphasis, Thirteenth Edition, Charles T. Horngreen
Nair, M. (2004) Overview, in Essentials of Balanced Scorecard, John Wiley & Sons,
Inc., Hoboken, NJ, USA.
The Balanced Scorecard: Transforming Strategy into Action, Robert S. Kaplan and
David P. Norton
References:

Appendix 1: Frequently
Asked Questions About
Balanced Scorecard

1. What are the benefits of the balanced scorecard approach?
Answer: The benefits of the balanced scorecard have been identified by
many organizations:
 Improved organization alignment Improved communications, both
internally and externally
 Linked strategy and operations
 More emphasis on strategy and organizational results
 Integrated strategic planning and management

2. What are the challenges encountered in implementing BSC?
Answer: There are several major challenges to developing and sustaining
the balanced scorecard:
 Engaged leadership
 Maintaining momentum
 Measuring what matters
 Not using a disciplined framework to build the system
 Mistakenly thinking a scorecard system is a short-term project (it’s
not….it’s a journey)
 Not involving a cross-section of the organization in developing the system
 Not thinking strategically enough
 Not incentivizing desired behavior changes

3. Is the BSC relevant for public sector companies?
Answer: Taxpayers, the ultimate customers of government, are demanding
more accountability for the use of their funds. They want to see tangible
results from all government agencies, at all levels. In the U.S., this demand is
reflected in the Government Performance and Results Act of 1993, one of
the most influential laws affecting how the Federal Government works.
More recently, the President's Management Agenda, promulgated by the
Office of Management and Budget, includes language requiring
performance-based scoring and budgeting of all activities of agencies in
accordance with top-level strategies. The balanced scorecard is the only
framework readily available that can align strategy, performance and
budgeting to meet these requirements. Therefore, government agencies are
increasingly looking to the balanced scorecard approach.

4. Is the BSC relevant for public non profit companies?
Answer: Nonprofit organizations are committed to a mission, and they need
to focus their limited resources efficiently in order to achieve mission
effectiveness and value for their members and sponsors. The balanced
scorecard system has a multiple focus on several perspectives, including
financial performance. For a nonprofit organization, profit is not a
determining goal of strategy; but good stewardship is important, so this
perspective or “lense” is used to describe the financial aspect of
performance. In this case, the balanced scorecard provides a comprehensive
framework that will help association directors and managers better define
strategies, track performance, and provide data to show their various
stakeholder groups how well they are performing in terms of mission value
and outcomes.

5. What is a strategy map and how is it different from a Balanced Scorecard?
Answer: Strategy map is a visual representation of the organization’s strategy. It
identifies the strategic objectives that the management team needs to focus on, and
the linkages (cause- effect relationship) that exists between them. Strategy Map is the
starting point for developing the Balanced Scorecard. The Balanced Scorecard
translates the organization’s strategy, as identified in the strategy map, into a
comprehensive set of performance measures, targets, and set of initiatives, providing
a framework for performance management.

6. What are the steps in developing a Balanced Scorecard?
Answer: The steps in the process of developing a BSC are to:
1. Identify the key outcomes critical to the success of the organization.
2. Identify the processes that lead to these outcomes.
3. Develop key performance indicators for these processes.
4. Develop reliable data capture and measurement systems.
5. Develop a mechanism for reporting these to the relevant managers and staff.
6. Enact improvement programs to ensure that performance improves.

7. What are the drawbacks of using a Balanced Scorecard?
Answer: The main drawbacks are outlined below.
 The BSC does not lead to a single aggregate summary control. The popularity of
measures such as Return on Investment (ROI) has been because they conveniently
summarize ‘how things are going’.
 Measures may give conflicting signals and confuse management. For example, if
customer satisfaction and financial indicators are both falling, do management
sacrifice one or the other?
 It involves substantial shifts in corporate culture to implement, such as the need to
re-focus on the long term. The organization must also be recognized as a set of
processes rather than separate departments.
 The approach is not a quick fix. It takes considerable thought to develop an
appropriate scorecard.

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