Use Balanced Scorecard for effective strategic implementation
Emerging out of the worst economic downturn in its history, Tolko Industries Ltd. was facing serious challenges. Tolko is one of the leading manufacturers of a wide range of forest products for customers around the world. It is a 60 years old company. Tolko’s prior strategy relied almost exclusively on sales to the U.S. and its sales dropped during the subprime crisis of US in 2007. The 3,500 employees were depressed by layoffs, and the company was challenged to retain good people.
Tolko is a privately owned forest products company based in Vernon, British Columbia. It manufactures and markets specialty forest products to world markets. Tolko’s products include timber, plywood, veneer, engineered wood products, and kraft papers. Brad Thorlakson had taken the helm as President and CEO in late 2010 and he and his team knew that the situation requires an urgent change. They realized the change needs to be such that their 3500 employees enjoy the change and get excited to work more seriously. The leadership team has deep personal ties to the company, their fellow employees, and the communities in which Tolko operates. The ensuing strategic plan document was in-depth, but very complex. And it was clear that the documented plan was not adequately aligned to the organization’s capabilities, business lines, and leadership with the strategy. So in an attempt to align strategy to business lines and leadership, Brad asked the VP of Human Resources to update Tolko’s incentive plan to link executive performance to strategic performance.
The VP of Human Resources reached out to the Institute for assistance in determining how to measure strategic performance on Tolko’s new strategic plan. While VP of Human Resources and Brad had heard of balanced scorecard, neither had thought of it as a cohesive strategic planning and management framework. After learning more about The Institute Way, Brad realized that simply aligning incentives to a complex strategic plan was not going to re-energize the company. The employees needed to see the big picture, hence the VP Human Resources and Brad opted for implementing the Balanced Scorecard for their company.
What is ‘Balanced Scorecard’? This strategic tool was first introduced by accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton. It was first published in 1992 in a Harvard Business Review article. Dr. Kaplan and Dr. Norton took previous metric performance measures and adapted them to include nonfinancial information.
The balanced scorecard (BSC) is used to strengthen good behaviors in an organization by unravelling four separate areas that need to be analyzed. These four areas are also called legs; they are learning and growth of the employees, business processes, customers, and finance. The balanced scorecard is used to attain objectives, capabilities, creativities and goals that result from these four primary functions of a business. For implementing the Balanced Scorecard organizations must be in a position to easily identify factors hindering company performance and outline the strategic changes to be tracked in future. With the balanced scorecard, they look at the company as a whole when viewing company objectives. An organization may use the balanced scorecard to implement strategy mapping to see where value is added within an organization. A company also utilizes the balanced scorecard to develop strategic initiatives and strategy objectives.
The Four Legs of the Balanced Scorecard are:
Financial Perspective: Norton and Kaplan regard the financial health of the organization at the top most. Precise and timely data is a must for getting always a priority, this is paramount for managers who want to get the complete picture. With the implementation of a large corporate database, the financial leg aims at creating automated processes. The financial leg tracks the financial performance of a business and its requirements which include return on investment (ROI), cash flow, financial results (quarterly and annually) and return on capital employed.
Customer Perspective: More and more, management researchers are realizing the huge importance of customer focus and customer satisfaction. If customers are not happy with a company, they easily drift to the competitor’s firm or substitution. Hence, poor performance from the customer perspective is an indicator of decline. Some of the areas assessed by this indicator include customer retention rate, delivery aspect, timely delivery, market share enjoyed by the firm, all these pointers mark the customer satisfaction degree and quality of product delivery for customers.
Internal Business Perspective: This perspective allows to measure business process needs, and its procedures. Metrics based on this leg allows the firm to know how smoothly the business process operates, in short it points at the value chain. This metric allows the firm to know whether its products and services follow the company’s vision and mission. Some of the areas that relate to internal business processes are process automation, process blockages, duplicate activities across functions, number of activities per function and process alignment.
Employee Knowledge, Learning and Growth: This perspective emphasizes on learning and growth of employees. It concentrates on the training and development aspect. Employees are the main source who help to maintain an edge in the organization’s identified business segments or the niche. This leg deals with questions like job satisfaction, training & learning opportunities for the employees. It also measures the employee turnover and level of expertise gained by them for the job. According to Norton and Kaplan, learning is considered a much more important criterion than training. Additionally, they emphasize the importance of using high performance index by assisting the employees with technology to improve their skills in order to create a better work environment.
Mapping Strategy: is an important initial task in building a balanced scorecard approach is what the Balanced Scorecard Institute calls strategy mapping in which a company focuses on their strategic objectives and then map them to each of the four evaluation areas. Information is collected and analyzed from four aspects of a business. This strategic tool looks beyond the traditional financial measurements of performance and examines the organization’s operations from the viewpoint of the customer, the shareholder, internal processes and organizational learning. Hence it caters of the long-term health of the organization and change management. The strategic map of company involves quantitative measurements, focused communication and employee empowerment.
The commercial vehicles business unit (CVBU) of Tata Motors was among the first Asian organizations to be initiated into the prestigious Balanced Scorecard Hall of Fame, in recognition of its exemplary success with the model. The company is one of the world’s top 10 truck manufacturers and the CVBU began deployment of Balanced Scorecard in 2000, in an attempt to cure years of poor financial performance. The focus was on achieving a turnaround, and then progressing to sustainable growth. Within 2 years of implementation, the company began to show tangible improvement in performance including a 40% growth in revenue.
The BSC is relevant to both manufacturing and service sector companies and similarly to both large and small organizations. While the U.S. army, with over one million people implements it successfully, a printing press in Sydney with hardly ten employees also can use it. Both are practitioners of the program. Similarly, governments and local bodies can benefit by implementing the balanced scorecard. For example, Mecklenburg County is the largest county in North Carolina and the most urban. The county, which includes the city of Charlotte, has approximately 969,000 residents and the population continues to grow at about 3 percent a year. Mecklenburg County has used BSC successfully for its governance, Ethiopian Health Ministry also has been successfully implemented the BSC strategy.
Most companies in 21st century use software solutions to track data related to the balance scorecard. As data is entered or collected it is computed within the balanced scorecard. The “Balanced Scorecard Institute” is quick to point out that software solutions do not create a balanced scorecard on their own. Companies have to develop their system and then use the software as part of implementation.
