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Balanced score card (BSC) analysis - Case study at Exxonmobil oil and gas group and development direction in Vietnam - 2


CHAPTER I‌‌

OVERVIEW OF BALANCED SCORECARD

I. Concept and role of Balanced Scorecard

1. Concept of Balanced Scorecard

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“The Balanced Scorecard (BSC) is a strategic planning and management system widely used in non-profit, government, industrial and business organizations worldwide. Its purpose is to align business activities with the organization's vision and strategy, improve internal and external communications, and monitor organizational performance against strategic goals. It gives managers and senior officials in organizations a more balanced view of the organization's overall performance.” [1]

The balanced scorecard includes the following elements:


-Perspectives: includes many groups of 4-5 goals


- Themes: are groups that include many strategic goals


- Objectives: are important factors in the organization's strategy.


- Measures: are tools to evaluate the organization's performance with goals to set

- Initiatives: are projects proposed to achieve the organization's goals.

The Balanced Scorecard, first theorized by Robert S. Kaplan and David P. Norton in “Translating the Strategy into Action – The Balanced Scorecard, 1996”, (See Appendix I) is built on four main perspectives: the financial perspective, the customer perspective, the internal business process perspective, and finally the research and innovation perspective. (See Figure 1). The term Balanced Scorecard can be divided into two parts: (1) Scorecard is the measurement, evaluation and management of activities and (2) Balanced is the balance between financial and

non-financial, external factors and internal components of the company, between short-term and long-term goals.

Figure 1: Four perspectives of the Balanced Scorecard [17]




While financial performance measures are very clear about what happened in the past, they are not well suited to the emphasis on how the organization creates real value today - that is, intangible assets such as knowledge, networks of relationships, etc. Therefore, financial measures are considered "lagging indicators". They are the result of a series of actions that have been taken in the past. The BSC complements these "lagging indicators" with future economic performance directions, also known as "leading indicators". But these performance measures (including both lagging and leading indicators) come from the organization's strategy. All measures in the BSC are understood as clarifying the organization's strategy.

Many organizations have attempted to communicate visions and strategies, but often failed to link employee actions to the strategic direction of the organization. The BSC allows organizations to clarify their visions and strategies by providing a new framework. This framework tells the whole story of the organization's strategy through the objectives and measures that have been chosen. Instead of focusing on financial control, the BSC uses measures as a new language to describe the key elements to achieving strategy. How the measures are used is critical to achieving strategy.

strategy. Measurable objectives are essential to translating strategy into reality. The BSC retains financial measures, but adds three other very clear perspectives: Customers, internal processes, and learning and innovation.

Financial Perspective : Financial measures are a very important element of the BSC, especially in today's profit-driven world. They show whether the strategy is being implemented to achieve the bottom line. Businesses can focus all their efforts and capabilities on improving customer satisfaction, quality, on-time delivery, or a host of other issues, but if they don't show a positive impact on the organization's financial metrics, all that effort is worth less. Typically, management is concerned with traditional metrics such as profits, revenue growth, and other economic values.

Customer Perspective: When choosing customer perspective metrics, organizations must answer two important questions: Who are our target customers, and what is the value we are delivering to them? These may sound simple, but they pose a significant challenge for organizations. Most organizations will claim that they have a target customer, and their activities demonstrate that their strategy is “Everything for everyone.” The reality is that a lack of focus reduces an organization’s ability to differentiate itself from its competitors. Determining the appropriate value to deliver to customers is also a significant challenge for most organizations. Many organizations will choose one of Treacy and Wiersema’s three rules of market leadership:

- Executive leadership: Organizations pursuing this goal typically focus on low prices, convenience, and generally no frills. Wal-Mart is a classic example of executive leadership.

- Product Leadership: Product leadership companies usually pursue product development that is unique to the company. They always try to bring the best products to the market. Nike can be an example of product leadership in sports goods.

- Customer Intimacy: Doing everything possible to provide solutions to individual customer needs will help a company win the love of customers. These companies often focus on long-term relationships with customers through deep understanding of customer needs. In the retail industry, Nordstrom is a model company for winning the love of customers.

Regardless of which of the three disciplines an organization chooses, the customer perspective today typically uses metrics such as: Customer satisfaction, customer loyalty, market share, and number of new customers.

Internal Business Processes Perspective : In the customer perspective of the balanced scorecard (BSC), we must identify the key processes the organization needs to perform to consistently add value to customers and ultimately shareholders. Each of the disciplines listed above will require the performance of specific internal processes that serve customers. The task of each business in this perspective is to identify those key processes and develop the best possible measures of improvement. In order to satisfy customer needs, organizations can identify new internal processes, rather than focusing their efforts on making minor improvements to the organization's current processes. Product development, manufacturing, production, delivery, and after-sales activities are considered in this perspective.

Learning and innovation perspective : Organizations want to achieve good results in the internal process and customer perspectives. So where do those results come from? Learning and growth measures are actually supports for achieving results in the other perspectives. In essence, these measures are the foundation on which the “house of the Balanced Scorecard” is built. When organizations identify measures and initiatives in the customer and internal process perspectives, they can quickly see the gaps between the current state and the levels needed to achieve the goals in fundamental factors such as employee skills, information systems, etc. The measures that the

Organizations that identify in this aspect will help fill those gaps and ensure sustainable performance in the future.

Employee skills, employee satisfaction, and resource availability can all be included in the learning and growth perspective. The measures we develop in this perspective actually support the measures in the other perspectives of the company’s Balanced Scorecard system. Think of it as the roots of a tree, which feed the trunk (internal processes) and then the branches (customer deliverables) and finally the leaves (financials).

2. The role of the Balanced Scorecard

The Balanced Scorecard helps companies scale the goals of each business unit to a single financial metric. Management can now measure how many customers each business unit generates now and in the future, how to leverage its capabilities, and what investments in people, systems, and processes are needed to improve future performance. The Balanced Scorecard captures the critical value-creating activities that are created by dedicated, skilled individuals in the organization. In addition to looking at short-term financial gains, the Balanced Scorecard also reveals long-term financial value and competitiveness.

The Balanced Scorecard emphasizes that financial and nonfinancial measures must be part of the information system for employees at all levels of the organization. Frontline employees must understand how their actions and decisions lead to the company's financial results, and senior managers must be the drivers of long-term success. The Balanced Scorecard's objectives and measures are derived from a top-down process driven by the mission and strategy of each business unit that actually integrates financial and nonfinancial performance measures. The Balanced Scorecard translates the company's mission and strategy into tangible objectives and measures. These measures represent a balance between external measures for shareholders and internal measures for the company.

and customers, with internal measures for key business processes, innovation, and research and learning. Furthermore, the Balanced Scorecard is a tactical measurement system. Innovative companies are using the Balanced Scorecard as a strategic management system to manage their strategy over the long term (See Figure 2). Here are four key roles of the Balanced Scorecard in implementing management processes in the organization:

- Clarify and understand the company's vision and strategy.

- Communicate and connect strategic goals with metrics

- Plan, set goals and align strategic initiatives

- Reinforce strategic feedback and learning.

Figure 2: Balanced scorecard in translating strategy into objectives [13]



2.1. Clarify and understand the company's vision and strategy

This process begins with the senior management team working together to translate each business unit’s strategy into clear strategic objectives. To achieve financial objectives, the team needs to consider whether to focus on revenue and market growth, profitability, or cash flow. However, especially on the customer side, the management team needs to be clear about which customers and market segments will determine the competition. For example, in one financial institution, 25 senior managers agreed that the company’s strategy was to provide the best service to its target customers. However, in setting these objectives,

Each manager had a different view of what good service looked like and who the target customers were. The process of developing the scorecard metrics resulted in a consensus among the 25 managers on the most desirable customer segments, and the products and services the bank should offer to reach those target segments.

After setting customer and financial objectives, an organization needs to identify those objectives and measures for its internal business processes. This identification represents one of the key improvements and benefits of the Balanced Scorecard approach. Traditional performance measurement systems, even those that use nonfinancial metrics, focus on improving costs, quality, and the closed-loop nature of the production process. The Balanced Scorecard focuses on the processes that are most important to achieving breakthroughs for shareholders and customers.

The final link to learning and growth is the rationale for investing heavily in employee retraining, information systems and technology, and improving organizational processes. Such investments in people, systems, and processes will create major shifts in internal business processes, for customers, and even for shareholders.

The process of developing the Balanced Scorecard clarifies strategic objectives and identifies the key elements of those strategic objectives, while also creating a common model for the entire enterprise so that each individual can contribute to that common development. The goal of the scorecard is to become a shared responsibility of the senior management team, which creates focus and teamwork among all senior leaders, regardless of their role in the HR or functional areas.

2.2. Communicate and connect strategic goals with metrics

The strategic goals and measures in the Balanced Scorecard are communicated throughout the organization through articles, newsletters, company videos, and even personal computer networks. This helps employees see the important goals of the company and what needs to be done well if they are to be successful.

want the organization’s strategy to succeed. Some organizations try to translate high-level strategic measures from each business unit’s scorecard into specific measures for operational levels. For example, the on-time delivery goal on the scorecard is specified as reducing the operating time of a specific process. In this way, internal improvement efforts become synonymous with organizational success factors. When all employees understand the high-level goals and measures, they can set specific goals to achieve the overall strategy of their business unit.

The balanced scorecard also provides a platform for communicating strategy to corporate and board management and helping them deliver on those mandates. The scorecard encourages a dialogue between business units and corporate and board leaders, not just about short-term financial issues, but also about how to execute the strategy to make a leap forward.

Thus, at the end of the communication and engagement process, everyone in the organization will understand the long-term goals of each business unit, as well as the strategy to achieve those goals. Individuals involved in internal activities will contribute to achieving the business unit goals. And all organizational efforts and initiatives will be transformed to match the necessary change process.

2.3. Plan, set goals and transform strategic efforts

The balanced scorecard has its greatest impact when it is deployed to effect organizational change. Senior management sets goals for the scorecard methods, which, if achieved within three to five years, will result in significant changes to the company. These goals represent the performance of each business unit. If the business unit is a public company, achieving the goal will result in a doubling or more of the stock price. Financial goals for the organization include doubling the capital turnover rate or increasing sales by 150% within five years. For an electronics company, the financial goal is to double the growth rate of current customers.

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