In other words, the BSC complements the financial indicators which refer to past performance with other measures of operational drivers that will lead to future performance. These last ones serve, due to its nature, as advanced information with regards to the achievement of the strategy and the key results or objectives.
The common objectives and performance indicators of the BSC derivate from the company’s vision and strategy and comprehend the performance in four different perspectives: Finance, customers, operations and learning and growth.
BSC MAIN COMPONENTS:
1 – STRATEGY MAP: it defines the key strategic objectives on a single page, showing the final destination or mission as well as the long-term key objectives and key milestones that must be accomplished along the way. The strategy map shows then the path and the balanced strategic objectives which are usually associated to four perspectives.
- Financial perspective: Outlining the financial objectives and KPI which will be the base for the rest.gic objectives which are usually associated to four perspectives.m key objectives and key milestones that must be accomplished along the way. The strategy map shows then the path and the balanced strate
- Customer perspective: Outlining the objectives related to customers and market segments.
- Internal perspective: Outlining the internal business objectives and key drivers.
- Learning and growth perspective: Outlining objectives related to employees, new projects in R&D, organizational culture and information technologies.
Precautions: Using a generic strategy map can lead to poor results or even worst scenarios. A strategy map must be representation of the company’s unique strategy and set of personal targets.
2 – KEY PERFORMANCE INDICATORS AND OPERATIONAL DRIVERS: These are the company’s navigation instruments that help the company to understand where it is during the course of the journey. They provide reliable information for navigation as just by knowing how well the company is doing against the plans or targets, the course of the journey can be corrected. In other words, they measure and monitor progress against the strategic objectives. Precautions: At that point, it is important to underline that the development of metrics and KPIs should be done after the strategy statement. Not doing it so, it is possible to miss the whole point of linking strategy with objectives.
3 – ACTION PLANS: They are built to monitor and coordinate the appropriate initiatives, projects and actions plans to move forward and achieve the objectives measured by KPIs in an appropriated and reinforcing manner. They provide the framework to adjust the course if needed.
The BSC must have the ultimate goal to transform and organization and achieve a substantial change in company’s results.
In general terms, the Balanced Scorecard is a strategic execution tool build to:
1.- TO CLARIFY AND TRANSMIT THE VISION AND MAIN OBJECTIVES AND STRATEGIES.
1.1 - Clarify company’s vision and main strategy: Articulate and communicate the vision, strategy and organizational culture through all levels of the organization. The business unit strategy is translated into specific strategic objectives (3-5 years), referring to each one of the perspectives and identifying the few performance drivers that will allow the company to achieve them.
The Balanced Scorecards must reflect an important common objective: The company significant transformation.
1.2 - Bring unit of purpose: The BSC brings unit of purpose and consistence with proceedings and actions as it integrates different measures and action plans in different strategic levels, time horizons and functional areas towards the achievement of the main or corporate strategy. The objectives and measures are quantifiable and they derivate from a vertical process supported by the objectives and strategies of the business unit, whose information flow must be bidirectional.
1.3 - The Balanced Scorecard is a team project: Starting with the complete support of the senior management, the BSC involves and must concern the whole organisation and can be broken down in different strategic levels. The BCS helps a shared understanding of the principal objectives and contributes to the inclusion, motivation, engagement and teamwork towards a shared business model for which everybody has contributed. Precautions: Not having the understanding across the company before its implementation is one of the most common mistakes that can lead to disappointing results.
2 - TO COMMUNICATE THE MAIN STRATEGY THROUGH ALL ORGANIZATION.
- The Balanced Scorecard is a multilevel information system: The BSC is a double-way communication and information system. The BSC can be broken down in cascade to different strategic levels, breaking down the strategic performance indicators into specific measurements at the operative level, process that contributes to the alignment of the objectives in different levels with the ultimate objective to contribute to the company’s success. The BSC must encourage the communication through the organization, the vertical one in double direction as well as the horizontal one between pears of the same level, all this with the goal to spread company’s long-term goals and strategy through the organization.
- The employees at lower levels must comprehend the operational and financial consequences of their own decisions and at what extend these contribute to the objectives of the upper level, while the top management must understand the cause-effect relationships between the financial indicators and the operational drivers described in the strategic map.
Once the objectives, strategy, performance measures and action plans are known, the BSC links the rewards to the performance indicators.
The BSC is, therefore, an integral information, communication, education and strategic management system, not only a control system.
3 - MONITOR PROGRESS: THE BSC BRINGS A SENSE OF DIRECTION, FOCUS AND STRUCTURE TO THE PLANNING PROCESS WITH AN INTEGRAL AND BALANCED MANAGEMENT SYSTEM THAT ALLOWS TO MONITOR PROGRESS.
The Balanced Scorecard brings, thanks to its methodology, direction, focus and the necessary structure to the strategic management system.
3 .1 - Objectives:
a- Balance of objectives in different time horizons: The BSC brings balance between different time horizons objectives: The BSC establishes strategic objectives between three to five years’ time which, if accomplished, they should transform the company. The BSC must balance the number of long-term, middle-term and short-term objectives. While the long-term objectives are more important, without the achievement of the short-term ones it will be difficult to achieve the first ones.
b- Objectives alignment: The BSC establishes linked objectives and performance indicators. Within all four perspectives, they
are at the same time consistent, balanced and mutually reinforcing.
The BSC brings focus and aligns the existing different strategic initiatives and action plans: It links the objectives with its strategy and initiatives in different time horizons: The BSC links the long-term strategic plans with the business plans at middle and short-term, the annual budgets of each business unit, the multidisciplinary action plans, the functional areas annual budgets and the operational or tactical operations.
If the strategic objectives are fully accomplished, this should represent a substantial change in company’s results.
3.3 - Performance indicators vs performance drivers: The BSC links the performance indicators with their performance drivers: It establishes cause-effect relationships between the performance indicators or the result measurements (for example financial indicators) and the drivers that will lead to this performance. The performance indicators such as sales/assets, ROCE on their own do not communicate the way how they have to be achieved. In the same way, action on the performance drivers such as the OEE, OFC or PPM on their own can lead to short-term operating improvements but theses might not be translated into financial performance improvements.
At a lower level, the BSC plans the key milestones: It leads to establish the sequential and time planning for specific key tasks whose achievement will lead to the accomplishment of their father objectives.
These cause-effect relationships between objectives and performance indicators and operating drivers is established at the “strategic map”.
3.4 - Resources: The BSC manages resources and capabilities: Quantifies and conducts resources and capabilities towards the achievements of the long-term objectives. This is done to each level, ensuring that they are being used in to score the level goals and in alignment with the ones of the above level.
4.1 - Training: The BSC performance indicators translate complicated concepts into tangible milestones, that allows an easier and better dissemination, training and understanding of the selected strategy.
4.2 - Strategic feedback: The BSC provides key information. It establishes the cause-effect relationships between performance indicators and the key factors to success. It is explicitly established though hypothesis the relations between the objectives of the different perspectives (What) and the strategies to achieve them (how) in order they can be measured, managed and validated. This includes time estimations and figures forecast.
4.3 - Assessment, learning and revision: The analysis of the feedback provided by the indicators in the four perspectives (finance, customers, internal and L&G) allows short-term periodic reviews, check the direction and the extend of success of the current strategy. The strategic feedback allows the assessment of the past performance, an eventual revision or change in the current strategy and a learning process highly valuable towards future actions.
Precautions: Not revising the strategy map with the feedback provided by the BSC is one of the most common mistakes that can make the company to keep going towards a wrong direction.
In a certain way, the BSC allows the top management to glance at the coming future, that is, to evaluate to what extend the expectancies for the future are still correct. In other words, inquiry whether the fundamental hypothesis that were established when the strategy was launched are still valid, or evaluate to what extend the established objectives are effectively generating value for the current and future customers and shareholders.