The Balanced Scorecard

Inhalt

1 Abstract

2 Introduction

3 Theoretic Foundation
3.1 What Is Strategy?
3.1.1 Strategic Management from Top to Bottom
3.1.2 Strategic Maps

4 Balanced Score Card (BSC)
4.1 Concept of the BSC
4.2 Fundamentals of BSC

5 Implementation of the BSC
5.1 Implementation of the BSC within a charity organization
5.2 Implementation of the BSC within a hospital
5.2.1 Financial
5.2.2 Customer
5.2.3 Internal Business Processes
5.2.4 Learning and Growth

6 Conclusions

7 Bibliography

1 Abstract

In the beginning of the 1980`s a new Management Theory was introduced. Rappaport made one of the first Concepts about business performance (Rappaport, A. creating shareholder value: the new standard for business measuring, New York 1986) in 1986. This was taken as a basis of creating shareholder value for several years. In the early 1990`s a unique term was created by Norton and Kaplan from the Harvard Business School. They developed a Framework which combined fiscal and non-fiscal key figures in one report to allow straight translation of defined strategy into deserved action, The Balanced Score Card (BSC). Even non-profit organizations must handle in a sensible way with funds they receive.

2 Introduction

In economically uncertain times strategies will no longer last for more than a period of several years. The reason is that modern enterprises are operating in a more or less dynamic environment. Therefore companies have to constantly adapt their strategies to the actual economic demands.

The spirits of managing (Thompson & Strickland 2003, p.3) reaches from attracting and retaining skilled staff by motivating and developing self competence in team members, to understanding core financial statements and delegating work effectively to setting the right goals, and minimize potential business risks. All of these steps are key actions in the daily business life of managers (HBSP 2007, p. 4, 5, 6, 206). Implementing and executing needs-based strategies to compete successfully has never been as important as nowadays (HBSP 2007, p. 4, 5,6, 206). “Doing the right things” (one visionary declaration) seems to be the universal paradigm of managers in the past, present and future. A strategic business plan, which is defined as an “Internal document that outlines an organization's overall direction, philosophy, and purpose, analyses its latest status in terms of its strengths, weakness, opportunities, and threats. Sets long-term aims, and formulates short-term tactics to reach defined goals”

(http://www.businessdictionary.com/definition/strategic-business-plan.html).

Far from being a simple guide to making money, what is indeed the truth behind it, strategy is a combination of competitive moves and business approaches to meet customers’ demands and reach for organizational goals. There are several schools of thought describing how companies might create value.

The approach of the Balanced Score Card (BSC) helps to convert individual strategic approaches to significant key figures. The goal is to align all processes in the right direction to reach predefined objectives. It represents an operational tool in the field of value oriented corporate management to excel in a complex business world.

The Balanced Scorecard, simplified as a system build up from balanced key figure numbers helps to convert corporate strategy. Developed first for fiscal based economy it is to become more and more important in the field of public based enterprises. The German health care sector, particularly hospitals, and home for the elderly are trying to employ, the methodology of the BSC, even still isolated. The available work concerns itself with possibilities of the application of the Balanced Scorecard within selected ranges of the health service. It can be used to set a basis for the quality management certification in such institutions (KTQ®), and can show the great importance of the customer perspective in that relation.

Besides short outlining the history and fundamental ideas of strategy, we will focus on the concept of the Balanced Score Card (BSC) and present examples of how this important modified strategic tool has been implemented in a non profit area such as care homes and hospitals represents.

3 Theoretic Foundation

3.1 What Is Strategy?

Strategy or need-based positioning (Porter 1996, p.6f.) is the creation of a unique and valuable position involving various sets of activities. It can also be seen as a process of determining organizational aims, selecting the line of action, initiating activities required to transform plans into action, and evaluating the net outcome.

Business planning requires extensive data analysis, a continuous process of navigating and utilizing internal and external resources to fulfill strategic goals. In order for a company to survive in a competitive market, and to react rapidly every managing step, measures taken by the company’s management should follow a predetermined strategy (Porter 1996, p.1).

According to Michael E. Porter (1996, p.1), strategic positioning emerges from three distinct sources:

- serving few needs of many customers (e.g.,oil change services provide only auto lubricant)
- serving broad needs of few customers (e.g., targeting only very wealthy clients)
- serving broad needs of many customers in a narrow market (e.g., operate in cities with a population less than 100.000 only)

Strategic positions can be based on customers’ needs, customer accessibility,

or the

Scope of a company’s products or services (Porter 1996, p.11),

Making trade-offs is another point in creating a sense of strategy. Some competitive activities are incompatible, thus earnings in one field can be achieved only at the expense of another area.

Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers

Strategy involves creating “fit” among a company’s activities. Fit has to do with the way a company’s activities interact and reinforce each other. “Fit” is one of the oldest ideas in strategy. More and more selected by strategic management and widely employed by executives as an instrument to differentiate core competencies, risk resources, and key success factors, and is in fact a main constituent of competitive advantage.

3.1.1 Strategic Management from Top to Bottom

Thompson and Strickland (2003) give an overview of strategic vision and mission in their well known Publication Strategic Management: Concept and Cases (2003). Basically, it’s about conveying a company’s „Who we are, what we do“to its employees via a strategic business plan. The cornerstones in implementing a strategic plan are the interrelated five tasks (Thompson & Strickland 2003, p.6, 7, see fig.1): Essential in strategic management is not only the commitment of the executive board but rather involvement of all stages within a company (Kaplan & Norton 1996, p. 199).

illustration not visible in this excerpt

Figure 1: The Five Tasks of Strategic Management

Source: Thompson and Strickland, Strategic Management (2003), p7

3.1.2 Strategic Maps

Strategy Maps are diagrams which show how an organizational system can create value. As explained above, all parties should be involved in the strategic business plan. Therefore a stringent simplification of a process is needed. Kaplan and Norton introduced a system which uses four perspectives of business items, which were centralized in the BSC: financial, customer, internal processes, and learning and growth, the strategic map shows in a comprehensive way the interrelations of those developed objectives. With that approach every employee is able to understand the corporate business strategy, and will easily implement the objectives into his or her daily business life (Kaplan & Norton 1996, p. 43).

By connecting such items (shareholder value creation, customer management, process management, quality management, core capabilities, innovation, human resources, information technology, organizational design and learning) in one display strategy maps are able to show the construction. In this approach an alignment can be created around the strategy, which makes a successful implementation of the strategy easier. But the implementation of a constructed strategy is the biggest challenge.

illustration not visible in this excerpt

Figure 2: Strategic Map

Source: www.dmreview.com/media/assets/article/1053395/Verth_fig1.gif

As a strategic part of the BSC main principles (www.12manage.com/methods strategy maps strategic communication.html) cause and effect relationships with each other. 1. Strategy can balance contradictory forces 2. Strategy is based on differentiation of customer value proposition. 3. Value is added through internal processes 4. Strategy consists of complementary themes. 5. Strategic alignment determines the value of intangible assets.

4 Balanced Score Card (BSC)

4.1 Concept of the BSC

Against the background of the former business measuring concepts, using fiscal key figure systems (shareholder value, stakeholder value) that are based on constrained past data, in the early 1990`s a unique framework was created by Norton and Kaplan (Research project with 12 Companies in the United States) from the Harvard Business School. They developed a concise concept which combined fiscal and non-fiscal key figures in one report to allow direct translation of defined strategy into deserved action.

The concept summarizes the collected and predefined key figures into numbers, and clusters them into four groups (Cobbold I. et. al.: The development of the Balanced Score Card as a strategic management tool (2GC PMA Conference Paper, 2002, p. 1, see fig. 3), as explained below.

The business performance according to an organization’s vision and mission is crucial for its very success. Managing a company only by taking financial data into consideration (which is always in retrospect) has major disadvantages.

4.2 Fundamentals of BSC

The Four Perspectives

The BSC Methodology as a strategic approach enables organizations to implement their corporate vision and mission. Working from 4 perspectives, the organization’s performance indicators are measured. (Kaplan R.S., Norton D.P.: The Balanced Scorecard: Translating Strategy into Action Harvard Business Press (1996))

Financial perspective: how does the single shareholder perceive the firm?

Shareholders are concerned with many aspects of an organization’s financial performance. Key figures of success are: market share, revenue growth, profit ratio, return on investment, economic value added, return on capital employed, operating cost management, operating ratios and loss ratios, corporate goals, growth, cost savings, return on assets, profit growth, measures, cash flow, net profitability ratio, sales revenue, growth in sales revenue, cost reduction, return on shareholder funds.

[...]