In my previous blog post, I touched on why your organization needs a strategy map. I discussed what a strategy map is and how it helps organizations translate their strategy. The strategy map provides the visual framework for integrating the organization’s objectives in the four perspectives of a BSC. It shows the cause-and-effect relationships that link desired outcomes in the customer and financial perspectives to exceptional performance in key internal processes. Furthermore, the strategy map highlights the precise capabilities in the organization’s intangible assets that are essential for delivering outstanding performance in the critical internal processes. In this post I will turn my attention on developing objectives for the financial perspective.
The balanced scorecard was developed to help organizations overcome their reliance on financial measures of performance. Proponents of the BSC argued that an excessive focus on any particular area of measurement often led to poor overall results. In order to successfully measure, manage and deliver performance, organizations must find a balance between financial and non-financial measures. The BSC provides this much needed balance. The tool balances the accuracy and integrity of financial measures with the drivers of future financial performance of the organization.
Although some criticism has been levied against the overabundant use of financial measures, a question that is normally raised is, “Should organizations include a financial perspective when developing their strategy map and BSC?” Despite their evident weaknesses, the answer is yes. Financial indicators represent a vital component of the scorecard process. Without financial objectives and measures of performance, even a well-built strategy map and BSC is incomplete. Financial performance measures show whether the company’s strategy, including its implementation and execution, are contributing to the bottom line improvement.
For profit-seeking organizations, the ultimate aim is to create greater long-term value for shareholders. To achieve this, the company must improve its revenue growth and productivity. Profitable revenue growth can be achieved through selling completely new products, selling to customers in entirely new segments and deepening relationships with existing customers. Strengthening existing relationships enables the company to sell more of its existing product or service, or additional products and services.
Enhancing productivity is achieved through improved cost structure and increased asset utilization. Implementing ABC/M enables you to gain complete visibility about your product, service, customer, channel and segment costs. This in turn will help you eliminate defects, reduce cash expenses and improve yields. Such cost reductions enable the organization to produce the same quantity of outputs while spending less on people, materials, energy and supplies.
Improving asset utilization is often achieved through managing capacity from existing assets and reducing the working capital and fixed capital needed to support a given level of business. For example, suppose you are a manufacturing organization or retailer, utilizing techniques such as just-in-time gives you the opportunit
- y to support a given level of sales with fewer inventories. Also, reducing unscheduled downtime on equipment provides you with an opportunity to produce more without experiencing an unnecessary increase in fixed assets investment.
Thus when developing the objectives of the financial perspective, the challenge is achieving a balance between the short-term and long-term objectives. Actions to improve revenue growth normally take longer to create value than actions to improve productivity. Under the day-to-day pressure to show financial results to shareholders, the norm is to favour the short-term over the long-term. As an organization you have to ask yourself, “How much further can you grow without overspending?” At the same time, “If you decide to focus more on austerity as a business model, what is the risk of distancing your company from customers who are hungry for innovative new products and services?”
Developing the first layer of the strategy map forces the organization to address this tension. Thus in order to drive shareholder value, the financial component of the strategy must include both revenue growth and productivity objectives. Balancing these two dimensions will ultimately set out the framework for the remainder of the strategy map.
Watch out for my next post on developing objectives for the strategy map customer perspective.