Introduction to Balanced Scorecard

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Introduction to the Balanced Scorecard and Performance Measurement Systems

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Chapter 1

Introduction to the Balanced Scorecard and Performance Measurement Systems by Christian C. Johnson

From the beginning, it is important to understand why measuring an organization’s performance is both necessary and vital. An organization operating without a performance measurement system is like an airplane flying without a compass, a Formula One race car driver guiding his car blindfolded, or a CEO operating without a strategic plan. The purpose of measuring performance is not only to know how a business is performing but also to enable it to perform better. The ultimate aim of implementing a performance measurement system is to improve the performance of an organization so that it may better serve its customers, employees, owners, and stakeholders. If one “gets” performance measurement right, the data generated will tell the user where the business is, how it is doing, and where it is going. In short, it is a report card for a business that provides users with information on what is working well and what is not. With this in mind, Chapter 1 provides an overview of the various performance measurement systems used today by enterprises to drive improvements in overall organizational performance. A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-

A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-defined strategy

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Balanced Scorecard for State-Owned Enterprises

defined strategy. In short, it enables a business to achieve desired results and to create shareholder value. The major performance measurement systems in use today are profiled below (in order of global adoption) and include • • • • • The Balanced Scorecard Activity-based Costing and Management Economic Value Added (EVA) Quality Management Customer Value Analysis/Customer Relationship Management • Performance Prism

THE BALANCED SCORECARD
The balanced scorecard (BSC) is the most widely applied performance management system today.1 The BSC was originally developed as a performance measurement system in 1992 by Dr. Robert Kaplan and Dr. David Norton at the Harvard Business School. Unlike earlier performance measurement systems, the BSC measures performance across a number of different perspectives—a financial perspective, a customer perspective, an internal business process perspective, and an innovation and learning perspective. Through the use of the various perspectives, the BSC captures both leading and lagging performance measures, thereby providing a more “balanced” view of company performance. Leading indicators include measures, such as customer satisfaction, new product development, on-time delivery, employee competency development, etc. Traditional lagging indicators include financial measures, such as revenue growth and profitability. The BSC performance management systems have been widely adopted globally, in part, because this approach enables organizations to align all levels of staff around a single strategy so that it can be executed more successfully.

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We will use the acronym BSC as a substitute for spelling out Balanced Scorecard. This saves space and is easier on the reader.

Introduction to the Balanced Scorecard and Performance Measurement Systems

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An example of a BSC is shown below:
Figure 1: Example of a Balanced Scorecard
Financial Perspective
Return on Capital Employed Cash Flow Project Profitability Profit Forecast Reliability Sales Backlog

Customer Perspective
Pricing Index Tier II Customers Customer Ranking Survey Customer Satisfaction Index Market Share Business Segment Tier I Customers Key Accounts

Internal Business Perspective
Hours with Customers on New Work Tender Success Rate Rework Safety Incident Index Project Performance Index Project Closeout Cycle...
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