BSC Designer – Balanced Scorecard Software

While recently travelling on the train from Kiev to Vladikavkaz, I shared the space with Alexei Zaikin from Greenstroi who told me about their high-tech construction technologies and innovative approaches that are ahead of the best practices even in America.

I was most fascintated by their key competitive edge, a program that they used for internal communication, project management and tracking of their information. A construction company with great technologies in their industry nevertheless regard their internal communication tool that they update from the sites of their construction, from their office and from the trips to suppliers their main edge.

His experience very much parallels mine. When the communication tools are well implemented, the culture of their use is universal and there is a world of complex problems to be solved, these tools are priceless. They can provide feedback, insight and support to the team. The secret of their effective implementation is that they do not only ad an encouraging feedback but that they help work on the business and only in it. They have the protocols that enable the effective communication with all the aspects of activities in creating the business scaffolding, not just supporting the business transaction.

This is another side of measurement, decidedly qualitative, but nevertheless no less important than the traditional quantitative measurements. A number of Balanced Scorecard measurements can be gathered and aggregated directly from such tools. We can measure the number and frequency of customer and supplier contacts, number and types of issues. Volume and quality of internal communication, as well as many others.

The power of the open communication tools extends beyond the internal communication, as the best tools on the market, such as the version of Open Atrium by the Bucket Brigade, Inc do. It allows to build a community of customers and suppliers, allowing them to share the data and interact internally within a system. Once the protocols of communication become polished, the skills easily transfer in to the world of social media. And that is when measuring the data that is accumulated in the system becomes really exciting. It allows us to clearly see all the different data points together, in the aggregated fashion.

—

Oleg Tumarkin, Juris Doctor, Master of Business Administration, Certified Six Sigma Black Belt is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with Bucket Brigade and AKS-Labs provides business coaching and Balanced Scorecard implementations.  His life’s passion is the development of a universal business measurement and management system that would cause management in to the realm of a repeatable, replicable, yet humane and flexible science.

oleg_tumarkin Articles

The use of Balanced Scorecard methodology to measure implementation of projects for corporate information system will make it possible not only to ground automation projects but also integrate them into the plans for organization’s strategic development, both at strategic and operational (budget) of the levels.

Recently, corporate information systems stopped to be attempts to follow the fashion.  They have become an inseparable part of organization management system.  That’s why the process of information system implementation (automation of management system) is viewed as inseparable part of the company strategy, optimization of its performance etc.  Optimization and automation are interrelated and implemented through completion of several stages belonging to one big project.  Implementation costs for such projects usually count thousands of dollars.  That’s why most business owners and top managers are worried about possible effect from investment into IT technologies.

It should be noted that every top manager has certain vision for development of his business.  Some managers have formalized documents (mission, objectives, strategy, business plan) while others take notes on paper or even keep everything in their minds only.  It doesn’t matter what development path a company chooses, but IT strategy should comply with it or at least have no conflicts with it.  Otherwise, IT technologies will do more harm than good.

As with implementation of any strategy, implementation of IT projects requires certain resources, both material and nonmaterial.  That’s why implementation of projects should be integrated into the budgeting system.  So, before making a final decision to implement IT project, a top manager should perform thorough analysis.

Efficiency evaluation of IT projects

There are different ways to evaluate project efficiency.  However, only two of them would work the best: financial (measuring profitability of a project) and mixed (measuring financial and nonfinancial profits generated by the project).  Their key difference is that financial approach measures only those results which can be formulated in terms of monetary gains.  However, such approach has its drawbacks since it is not always possible to evaluate advantages of a project in monetary (financial) terms.  In the modern world of business intangible assets are most valued for major companies.  For example, only 20-25% of an automobile price is comprised of physical component.  All the rest is various licenses, know how etc.

Or imagine such a situation.  Your company is on the rise.  Sales are 100% up in this month!  You have exceeded the budget, and your employees received bonuses.  But in several months sales have suddenly dropped, customers went to competitors, dealership chain is glitching.  Having analyzed situation, you found out that the amount of products has decreased during the past months, while you customers are not satisfied with the support.  Dealers are not regularly supplied with products, and sometimes receive even wrong products.  If you paid attention not only to finance but also other factors such as customer and dealer loyalty you could have avoided such a situation.  Delivery of quality products and high quality of customer support service could win customer loyalty which cannot be evaluated in monetary terms.  That’s why it would be incorrect to evaluate company success by measuring financial indicators only.  And that is why, Balanced Scorecard (BSC) system created by Norton and Kaplan has gained tremendous popularity since BSC takes into account financial and nonfinancial indicators.  This also concerns implementation of information systems.  Much has been written about Balanced Scorecard, so let’s give a brief overview of the four BSC perspectives:

• Customer (shows how customers view the company)
• Finance (shows how shareholders view the company)
• Internal business processes (shows internal resources)
• Innovation, learning and growth (shows competitive advantage and future prospects)

Very often business owners are very skeptical towards IT technologies since they do not see direct financial results behind implementation of IT projects.  But without proper automation systems Balanced Scorecard is very difficult to implement.  Let’s explain why.

Balanced Scorecard gives positive results only in case an effective and fast feedback system is established.  It is also very important to timely collect, analyze and share information.  This is important both for top management and front line managers who directly contact customers.  The problem with many companies is that employees are not properly motivated since they are untimely rewarded for implementation of personal and strategic goals of the company because of problems with communication and feedback system.  This is where IT solutions can help.

Balanced Scorecard consists of numerous indicators which should be timely evaluated, and evaluation results need to be used in decision making to respond to challenges and strategic problems.  At a first glance, implementation of a reliable information system will imply no financial gains.  However, in the long term such a system will become inseparable instrument in implementation of a company strategy.

In relations with customers, managers are to be armed with all possible tools to give customers all possible information on products and services, special offers, discounts, tech information, warranty issues etc.  As said above, customer loyalty cannot be measured in dollars, but still customer satisfaction and loyalty brings financial gains in the long-term.  A loyal customer becomes a regular customer for the company, and thus, a regular source of income. With excellent IT support a manager can offer his customers the most complete information on products and services.  Besides, an effective IT solution makes it possible to serve a larger number of customers and potential customers which is also an important indicator in evaluation of customer relations.

When implementing Balanced Scorecard, it is imperative to align strategic goals of all departments and business units of a large company with its general strategy.  This is where an effective communication and feedback system can help.  Automation of business processes results in optimization of key performance indicators for business processes.  Improvements in key performance indicators lead to critical success factors that make it possible to implement strategic goals.

Summary

Use of Balanced Scorecard to evaluate efficiency of information system implementation makes it possible to measure conformity of such project with strategic goals of an organization.  At that, financial and nonfinancial goals of a company should be evaluated to make this measurement complete and objective.

Implementation of IT projects is necessary for functioning of Balanced Scorecard itself as well as to supplement existing strategy of the company.  In other words, Balanced Scorecard may be used to evaluate efficiency of IT project and its conformity with strategic goals, and IT project can be used to make work of Balanced Scorecard effective.

bsc_ideas Articles, BSC implementation

Since the early 1990s, when Balanced Scorecard was first introduced to the world of business by Norton and Kaplan, the system has gained tremendous popularity among different organizations, companies, transnational corporations, midsize and small businesses, nonprofit and governmental organizations etc.  Sure, there is no universal way to implement Balanced Scorecard.  The choice of indicators and measures, response actions and feedback/communication systems solely depends on company strategy, its maturity, internal structure and readiness to use Balanced Scorecard.  It should be noted that Balanced Scorecard is implemented differently in different business areas.  Some markets experience very tough competition while others are to be developed and conquered.

When most people are talking about Balanced Scorecard implementation they mostly mean commercial businesses.  Indeed, the goal of Balanced Scorecard is to put company strategy into action by developing a number of key performance indicators.  All indicators and actions are subordinated to financial goals.  Any commercial organization aims at making money, and Balanced Scorecard is a great tool to improve performance of the company and its financial results.

However, BSC can be effectively used in nonprofit and government organizations at all levels.  Balanced Scorecard keeps its four traditional perspectives: financial, customer, internal processes, learning and growth.  Some of them look exactly like those applied in commercial organizations, while others are adjusted to specific nature of nonprofit and government organizations.

4 perspectives with cause and effect linkage (for non-profit organization)

Balanced Scorecard implementation: when no money making goals are set

It needs mentioning that use of BSC in governmental bodies, NGOs and non profit organizations is not that popular as in commercial business.  However, it is possible to create certain indicators within the four categories of nonprofit BSC.

• Financial accountability.  Most nonprofit and government organizations have to report on how they spend funds
• Products/outputs.  This indicator evaluates products and services delivered by government organizations as well as number of people served
• Standards of quality.  Every government and nonprofit organization should follow certain standards of rendering particular kinds of services.
• Customer satisfaction.

Sure, this is not the full list, but these indicators vividly demonstrate that Balanced Scorecard can integrate into the everyday work of nonprofit and government organizations.

The 4 perspectives in non profit BSC

Customer

If commercial Balanced Scorecard usually starts with financial perspective, i.e. setting of financial goals, in the nonprofit area customer perspective comes to the first place.  Profit seeking companies have the goal of earning money, increasing value of the company etc.  Government and nonprofit organizations usually have one ultimate goal – serving customers.  In case of government organization, a customer is a taxpayer.  He can be compared to a shareholder in the company who invests his money to get profits.  Taxpayer pays money to get different services from government.  That is why customer perspective is most important both for government and nonprofit organizations.  For example, local culture department may set a goal of promoting classical music or outdoor sports in the local community.  It means that target customers should receive high quality services related to classical music or sports.  In other words, the mission is accomplished only when customers are properly served.

Financial

At the same time, no Balanced Scorecard is complete without a financial perspective.  There is no government or nonprofit organization that can offer high quality services without proper funding and proper fund allocation. NGO do not earn money but they think of the most efficient ways to spend money on social projects.  Let’s take the above example with classical music and sports.  Efficient fund allocation will certainly lead to better results (more tournaments and concerts organized, higher organization level).  If a nonprofit or government organization efficiently spends money or can successfully operate with the minimal budget, it is likely to attract additional funding from sponsors or central government.  Growing donations is a great goal for any nonprofit organization. In such a situation everybody wins.

Internal processes

Internal processes in non profit and government organizations are as important as in commercial businesses.  The key question in internal processes category is: “What should you do to drive most value for our customers/taxpayers?” It is imperative to choose only those processes that directly lead to improved results to customers and lead nonprofit and government organization to strategic goals.  As a rule, such processes will flow from customer perspective, namely from measures and objectives.  Usually, internal processes category contains the most number of both objectives and measures.

Learning and growth

One should not forget that any business or organization is run by people.  That’s why, learning and growth perspective is equally important in BSC implementation in nonprofit/government organizations which mostly employ dedicated and skillful staff.  Properly motivated employees having necessary skills and tools to operate in a positive organization climate are more likely to drive nonprofit /government to its strategic goals and sick your alignment to mission.  Information capital as well as employees skills and competencies are especially relevant to this perspective.

Summary

When implementing BSC in non profit and government organizations it is reasonable to use multipurpose approach.  It would be wrong to use Balanced Scorecard in nonprofit organizations in the same way as this system is used in commercial companies.  Financial goals and criteria can hardly play the most important role for a nonprofit organization.  Relations of government bodies with taxpayers hardly resemble business-customer relations.  However, Balanced Scorecard offers certain opportunities related to adaptation of strategic maps to government/nonprofit sector.  As long as government and nonprofit organizations have a mission they can certainly use Balanced Scorecard to communicate operational activity and strategic goals, vision, values and mission.

In short, key benefits of BSC implementation in nonprofit/government organizations are:

• Efficient fund allocation
• Quality products/services to tax payers/target customers
• Improving customer satisfaction
• Attraction of new sponsors/growing donations
• Improving image of government organizations in eyes of taxpayers
• Optimizing internal processes aimed at implementation of strategic goals
• Adherence to missions and values of organization

When implementing BSC in nonprofit/government organizations one should note that:

• Customer perspective plays the most important role, but
• Financial issues are very important as well (efficient funds allocation, growing donations etc)
• Relations between government bodies and taxpayers are not like those between commercial companies and customers

bsc_ideas Articles, Balanced Scorecard Theory

Balanced Scorecard system is a management and strategy evaluation tool that transfers mission and strategy of an organization into that balanced complex of integrated performance indicators.  Such indicators give a short but at the same time a full picture of how organization approaches its goals and implements tasks.  Companies using Balanced Scorecard report differently on implementation success.  This article reviews 2 practical case studies.

In the first case study automobile company has successfully implemented Balanced Scorecard and integrated it in the everyday work of employees.  The second case study reviews the bank that substituted BSC with an alternative method, having considered Balanced Scorecard inappropriate for creation of a corporate culture.

The role of BSC in both organizations is being contrasted in order to answer the question “Why do implementation results and satisfaction of companies’ management differ?”

What is the role of BSC?

As said above, Balanced Scorecard is a system that translates strategy and mission into a set of key performance indicators.  One of the greatest advantages of Balanced Scorecard is that encouragement and reward for employees is based both on financial and non-financial indicators (of course, in case such employees contribute to implementation of company strategic goals).

Creators of BSC Robert Kaplan and David Norton claim that new skills and methods need to be used to survive in a tough competition of today’s markets: customer relationships, innovation and individualization of projects, education and motivation of personnel, enhancement of IT technologies.  By the inclusion of all key success factors to the Balanced Scorecard, the organization will have a clearer picture and ways to reach objectives.

Balanced Scorecard adds non-financial indicators to financial ones.  These are indicators referred to customer relations, internal business processes, learning and growth.  Lagging indicators are mixed with the leading indicators, as according to Kaplan and Norton, “without leading indicators, lagging indicators will tell nothing on how results were achieved.”

Balanced Scorecard tells a short but at the same time full story of company achievements and the process of goals implementation.  This is a full picture describing everything that happens inside and outside the company.  Use of Balanced Scorecard with a fair bonus and compensation system for employees improves their motivation, encourages them to participate in decision-making, create innovative projects etc.

BSC implementation

Balanced Scorecard may be used to reach such objectives as:

• Clarification of adopted strategy
• Making employees familiar with company strategy
• Agreement of strategic goals for departments and personal tasks for employees
• Integration of strategic tasks to strategic goals and budget
• Identification and coordination of strategic initiatives
• Periodical and systemic strategy review
• Establishment of a reliable and flexible feedback system to correct strategy, if necessary

BSC implementation often begins with development of corporate strategy and identification of its implementation results such as:

• Choice of indicators (selecting the most important key performance indicators)
• Identification of cause and effect ties
• Development of hierarchy in strategic maps
• Development of a clear bonus and compensation system to motivate employees
• Development of infrastructure and information systems (tools to collect and analyze information)
• Development of feedback system (regular meetings or sessions two analyze communication and feedback tools)

Case study number one. Automobile enterprise LMN

During the survey representatives from the top management of the two organizations (bank and automobile enterprise), responsible for implementation of BSC, were asked questions.  2 hour meeting included an interview on current problems and a freestyle conversation, the topic of which could be chosen by respondent.  Managers were to fill in questionnaires on stages and problems of BSC implementation.

LMN enterprise first started using Balanced Scorecard before 1993.  But it was not until 1995 when this system was implemented in full.  At first, administration made production departments familiar with indicators, but managers did not understand what to do with the obtained information.  In several years a standard evaluation process was established based on five key indicators: security, quality, profitability, personnel, finance/costs.  Cause and effect relations could be hardly identified, and that was one of the major problems in BSC implementation.

BSC System helped LMN focus on customer needs.  If there is too much information and indicators often conflict with one another, it is very difficult for company management to pick the most important KPIs.  As one of the respondents said, “there is always compromise between quality and quantity.”

With the help of Balanced Scorecard enterprise management organized production and management process in such a way so that when employees faced the question “what to do”, they always had a clear answer.  If a certain action has no impact on Balanced Scorecard, then taking such an action may be quite unnecessary.

The company used only a limited number of clear indicators at all production enterprises.  Chairmen of all plants wanted to make sure they are all evaluated according to one metric system and they can influence decision-making process.

Results of BSC implementation

BSC was successfully integrated in the corporation everyday activity.  Financial analyst working for this company says: “BSC adds constancy of focus and objective to corporate vision.  Even ordinary employees tend to understand it.”

In order to familiarize employees with BSC implementation results and motivate them, the company used “traffic light” reports.  Once a month the management measured indicators to see whether or not annual plan is being fulfilled.  Red light warned company management that the enterprise is far from objective, red light signaled about risk of non fulfillment, while green light demonstrated that the plan will be fulfilled.

Existing IT infrastructure made it possible to develop an efficient feedback system.  It became possible to see what has happened in the previous month and what the company should expect in future.

Balanced Scorecard helped review compensation and reward system for employees which was based on financial indicators.  However, non-financial indicators were also taken into account due to cause and effect ties.

BSC helped employees at all levels understands impact of their work on the total results for the company.  Plans for departments and enterprises were corrected and amended if necessary.  Identification of cause and effect ties appeared to be a major problem.  But it is this sphere that underwent most changes, and it is in this sphere that most positive results were achieved.

According to respondents, Balanced Scorecard had three obvious disadvantages:

• Every production enterprise in the company used own program and interpreted all indicators in own way
• Indicators were not related to company objectives
• They formulation of standards and indicators resulted in their various interpretations and manipulations

However, BSC helped everybody realize responsibility and create feedback/reporting system.  One of company production managers says: “I have never felt so much responsibility for results of my work.  I know exactly what I am expected to do and what I should do.”

Case study number two. Bank XYZ

In 1995 XYZ bank armed itself with Balanced Scorecard and the system of bonuses and rewards for employees.  The program was based on evaluation of work results (once a quarter) with further possible payment of bonuses which depended on performance of certain branches, departments and employees in such areas as finance, personnel (serving customers, relationships between employees, public relations) and operations (audit and control).

To control financial and nonfinancial indicators the Bank used different systems.  Financial indicators were monitored by computer system, while non-financial indicators like customer satisfaction were measured through survey of customer opinion which was carried out by Gallup Poll company.

Balanced Scorecard offered XYZ bank a number of advantages:

• BSC is employee oriented.  Company goals are clearly formulated, and those who work well will be rewarded
• BSC helps management educate personnel and make them familiar with company goals
• BSC is a fair system since it can differentiate good and bad employees

However, despite these advantages the bank rejected BSC System and substituted it with compensation plans program.  A number of problems have appeared, and Balanced Scorecard turned ineffective due to changes in regulation policy for banks, insurance sector and stock market.

Problem number one. Regional branches and apartments interpreted Balanced Scorecard in their own way.  In some regional branches  top managers conducted meetings and discussed Balanced Scorecard in public, while others made all decisions privately.  Some departments faced certain problems with share of bonus pool.  One of the main obstacles was that employees received different bonuses for extra work, innovative and creative ideas etc.

The second problem was that head of branches considered BSC an ineffective management tool.  Those who worked better did not necessarily get fair compensation.

Thirdly, BSC failed to secure a high level of customer service.  Gallup Poll company could only measure customer satisfaction at a certain time and in relation to a certain customer group.  The bank has found out that if there are unsatisfied customers it would be wrong to think of the negative trends of customer satisfaction in general.

The 4th problem was additional responsibilities and duties for bank top management.  Head of departments and branches have to collect and summarize indicators for each employee, so that bonus pool could be fairly shared.  Top managers also have to devote at least one hour to each employee and discuss BSC indicators.  As a result, payment of bonuses was quite delayed (2-3 months after accounting period).

Summary

The case study lead to interesting conclusions.

Firstly, speed of feedback system has a great impact on BSC efficiency.  Delays in feedback and communication in XYZ bank forced management of this organization give up on BSC implementation.

Secondly, BSC Works better if employees are involved in the process of selecting key performance indicators and measures. XYZ management introduced all indicators on the top level. In LMN management offered me you evaluation systems, but employees were free to decide how to use them.

Thirdly, BSC is most effective during the period of organization changes.

Finally, due attention should be given to the number and types of key performance indicators.  A set of indicators should not cause problems with their evaluation otherwise BSC will consume much time and become quite expensive. In XYZ bank implementation of the system was quite a lengthy process and when the bank had to reorganize, changes of Balanced Scorecard appeared to be quite complicated and costly.

bsc_ideas Articles, BSC implementation, Case Studies

The last decades saw a skyrocketing development of concepts for corporate governance and business management systems.  Strategic management has received a special attention.  Studies have shown that running midsize and big business without strategic management system is full of risks.  That’s why several new concepts, tools and paradigms have appeared in the field of strategic management.

BSC model by Norton-Kaplan

One of the most interesting performance evaluation systems based on Balanced Scorecard concept was offered by Robert Kaplan and David Norton.  The aim of Balanced Scorecard is to implement strategic goals in reality, as well as link strategy with operational management and cost factors. The key peculiar feature of Balanced Scorecard is that it is closely connected with business processes aimed at meeting demands of all customers.  Moreover, all employees of the company are involved in this process.  Balanced Scorecard focuses on strategic development unlike traditional management systems which as a rule took into account only financial indicators.  BSC model represents enhancement of the system information potential through inclusion of non-financial indicators in order to achieve strategic goals.  Normally, non-financial indicators are closely related to key success factors, i.e. with the strategy.  The figure below offers visual representation of BSC model.

BSC system sorts out indicators into categories which the authors of this system called perspectives.  Such perspectives make it possible for the company management to identify strategic goals and measures, and focus on implementation of certain objectives by using obtained knowledge on efficiency of business processes.

There are four perspectives in Balanced Scorecard model by Norton-Kaplan:

• Financial
• Customer
• Internal processes
• Learning, innovation and growth

Balanced Scorecard model by Norton-Kaplan is not the only one.  Below are alternative systems which also use indicators to link operational management and strategy of an organization.

BSC model by Norton and Kaplan

Maisel model

The model by Lawrence S. Maisel was offered in 1992.  It has the same name as the model by Norton-Kaplan. Maisel also defines four perspectives based on which business activity should be evaluated.  Instead of learning and growth perspective Maisel uses human resource perspective which measures innovation, as well as such factors as education, development of production services, enhancement of competence and corporate culture.  It is possible to say that these systems have very slight differences. The reason why Maisel uses perspective of human resources is explained by the fact that the company management should be more attentive to personnel and measure not only efficiency of processes and systems , but also evaluate performance efficiency of employees. Maisel BSC model was first introduced in the article “Performance Measurement. The Balanced Scorecard Approach”, in Journal of Cost Management.

Maisel BSC model

Efficiency pyramid

In 1990 C.J. McNair, Richard L. Lunch and Kelvin F. Cross introduced a model which they called efficiency pyramid. Similar to the above mentioned models, the key concept of efficiency pyramid was connection of customer oriented corporate strategy with financial indicators, supplemented by several key quality (non-financial) indicators.

Traditional managerial information should come only from the upper level. Efficiency pyramid is based on concepts of total quality management, industrial engineering and counting based on actions.  Actions imply everything done by people and machines (equipment, mechanisms, computer systems) to satisfy customers’ needs.

Efficiency pyramid has four different levels that show organization structure with feedback and communication systems necessary for decision making at different managerial levels.  Objectives and indicators communicate organization strategy with its operational activity.  In other words, objectives are transferred top to bottom while indicators are gathered vice versa (bottom to the top).

Efficiency pyramid

At the top level company management formulates corporate vision.  The second level includes objectives for departments and subdivisions in accordance to a certain market and financial indicators.  Customers and shareholders define what needs to be evaluated.  The third level is virtually non organizational.  It consists of a number of aspects focusing on satisfaction of customer needs and flexibility of production process.  Indicators here are measuring customer and financial objectives.  The last level deals with quality, delivery terms, production cycle, losses etc.  Quality and time for delivery are related to external environment, while production cycle and losses are indicators for internal processes of an organization.

It needs mentioning that indicators in the bottom of pyramid are measured every day, every week or every month.  In the top of the pyramid financial indicators dominate, and thus they are measured not so often.  Of course, indicators in the bottom levels should be subordinated to indicators in the top.  This system makes it possible to show what financial indicators are based on, and what drives them.

This model was first introduced in Management Accounting magazine, the article “Do financial and nonfinancial performance measures have to agree?” in November 1990.

ЕР²М model

In 1993 Christopher Adams and Peter Roberts offered another model which they called ЕР²М that stands for Effective Progress and Performance Measurement. The model is visually represented in the following scheme.

Effective Progress and Performance Measurement

According to Adams-Roberts, the company should focus on the following 4 directions:

• Serving customers and markets
• Enhancement of internal processes (efficiency growth and profitability increase)
• Strategy and changes management
• Freedom of actions

This theory implies that strategic management has 2 consecutive stages: strategy development and strategy implementation.  Development of strategy is an analytical process which answers the question “What needs to be done?” Implementation is a two sided process: on the one hand this is organization process which answer the question “How goals will be achieved?” and “Who will achieve them”, while on the other hand it contributes to development of managerial skills and change management.

The goal of the system is not only implementation of company strategy.  The company management should also get used to the fact that frequent changes are quite normal.  Employees who are involved in decision-making and implementation of strategy should be armed with effective feedback system.

Summary

It should be noted that use of strategy management systems will make it possible for a company to see real state of things.  It does not mean that financial indicators became meaningless.  It means that financial indicators should be balanced with nonfinancial ones.  BSC System is the most promising concept which makes it possible to transfer operational activity into strategy, as well as create a full set of indicators that make a solid system of strategic control and management.

bsc_ideas Articles, Balanced Scorecard Theory

You wouldn’t object to the statement that identification and implementation of goals is in fact  business management, would you?  There are very few businessmen who have never set unachievable goals. Unfortunately, this is the only way most people start asking questions like “Did I set a correct goal?”, “Is it a true objective?” or “What is a goal and how one should identify it?”

Businessmen often blame unreliable partners, witty competitors and stupid employees for failures in business.  But the problem should be solved inside the company.  Setting of correct goals has turned into an international problem.

There has been much debate over identifying goals and objectives.  Some famous American consultants claimed in their reports that the management process begins with setting of objectives.  Their opponents say that much work needs to be done even before setting of objectives.  Moreover, the term objective or a goal is interpreted and understood in many different ways.  Such notions as mission, vision and objective are often confused.  All these notions refer to future which business owners want to see.  But these notions cover different aspects and characteristics of such future.  Confusion of the above mentioned notions may make result in the situation when planned future will never come.

What is objective?

Let’s set a funny example vividly demonstrates in misunderstanding of objective.  A lecturer came to meeting of department chairmen at a huge industrial enterprise.  Before that he had purchased a large kitchen knife in the store.  The meeting focused on goals and objectives.  The lecturer started with a simple question to the audience: “What are your objectives?” One listener raised his hand and said: “My objective is making much money.” “Excellent,” the lecturer answered, taking out his knife. “The guy in the first row has one million dollars in cash.  Taken the knife and kill him, and your objective will be reached.” “But I will be imprisoned,” answered the men. “So, what? You never mentioned in your project if that you want to have money and before he and the same time”, replied the lecturer.

Is this just a joke?  Well, yes and no. Inconsistency in setting of objectives and lack of attention to details often results in side effects which were not initially expected.  Sometimes these side effects have a very negative influence that can bring achieved results to naught.

There is a good example related to color metal market.  Russian producers hit the international market with enormous volumes of color metal.  Obviously, they had a goal of selling a certain amount of products.  They reached their goal.  But what was the result? Enormous supply resulted in sharp decrease of prices.  Thus, Russian suppliers had no financial benefits, although formally their goal was achieved.  Moreover, such situation led to the unification of western producers against Russian companies who were rejected to enter certain markets.

Objective is a detailed plan of the future: future enterprise, future products, future life.  The objective should be formulated in such a way so that in course of implementation time the answer to the question, whether or not objective has been reached, would be either yes or no.  Partially reached objective is no objective at all.

Objective, destination, mission

A customer comes out of the store with his purchase.  What is the result of his visit to the store?  A customer experiences satisfaction depending on what he has purchased (whether or not he managed to buy all products he wanted to buy) and how he has purchased a product.  So far, he experiences satisfaction or non satisfaction from the buying process.  He will experience satisfaction from purchased products later when he starts using them.  What are the roles of product, seller and customer himself in evaluation of buying experience?  How is responsibility split between them in case of a bad purchase?

Everyone who produces something gets the product which is often used by someone else.  The product of manufacturer is the product which a customer buys.  Seller’s product is the service of selling the product.  Customer uses both products: first sales experience and then the product itself.  The end result depends on how a customer uses both products.  Even the best delicacy can be served in such a way that no one will eat it.

When a customer goes to the store or sales department he has his own concept on desired result: what he wants to buy and how he should be served.  In such a way he sets destination for producer and seller who need to meet expectation of their customers.  But this doesn’t mean that a customer always has clear concepts and ideas on what the product should be and how a customer should be served.

Sometimes companies influence the customer and form new demands and preferences, thus making a new destination for their business.  But directly or indirectly, the company destination is definitely set by the customer.

Destination is formalized by producer or seller in form of objectives: products and services they are going to offer.  Thus, producers and sellers bear responsibility for compliance of their destination with customers’ requirements and preferences.

If objectives of producer and seller do not comply with the destination set by the customer, products and services will be in little demand.

Every business aims at manufacturing of goods and rendering services.  At the same time, every business aims at own reproduction.  The goal of reproduction is the desired future of a company (for example, to be occupied in the same activity and get as much profits as now).  Reproduction objectives always dominate over production objectives.  So, it is very important to balance these objectives in relation to products/services and the company activity to be secured in future.  Sometimes these objectives can conflict which makes them unachievable.

One customer cannot make the business profitable.  When we mean customers we mean lots of them.  Consequently we are talking about social significance of a company and its mission.

Mission is a purpose for foundation of a company and the final social result which will be paid by the society.  Mission should not be confused with destination which is a planned direct result obtained by the customer.  For example, if the company produces ammunition its destination is supply of certain weaponry types with ammunition, while the mission will be securing fighting efficiency of certain military units.

If the mission is clearly formulated and the company follows it, this means that the products/services offered by the company are in high demand in the society.  So, objectives of the company should comply with its destination and reproduction conditions, while destination should be subordinated to the mission.  In such a way products/services offered by the company would be in high demand.

Product/service cycle

Who sets objectives?

Objective is set by someone who reaches it. But when we’re talking about large companies we’re talking about hundreds and thousands of people who may have their own objectives or they interpret objectives of top management in their own way.  This is where human resource management comes into play.  The work should be organized in such a way so that when employees reach their goals they will automatically follow destination of the company.

For example, it may happen that very few people will say they are working for a chemical enterprise to produce high quality chemicals.  Employees may work for a company having their own preferences and objectives.  People want to earn money, work in a company with a positive organization climate, feel socially secured etc.  So ideally, by implementing their own goals (earn money, enjoy working atmosphere) employees should follow company destination – produce high quality chemicals.

How to set objectives?

In order to set an objective one should answer the following questions: “What do I want do?”, “What am I able to do?” and “What should I do?” It is ridiculous, but the first question is the most difficult to answer.  Correct answer to this question would outline the company vision which is formed based on the current problems.

Identification of problems requires serious analytical work.  Future vision is formed based on analytical results combined with creative ideas and preferences of those who set an objective. Evaluation of own capabilities (What am I able to do?) is a very important stage in setting of objectives.

Things to consider when setting an objective

If the objective is set in such a way so that it makes it possible to solve current problems, the objective is supported by existing potential and resources, compliant with the legislature, ethics and ecology issues, one has every reason to consider such an objective achievable.

Summary

• True objectives cannot be partially achieved
• Objective should include detailed description of implementation methods
• One should take into account side effects of objective implementation
• Never confuse objective, destination and mission
• Objectives are to be set by those who will reach them
• Company employees may have own objectives. HR department is to organize the work in such a way so that implementation of employee’s objectives complies with company destination
• Objectives need to be realistic (in terms of finance, legislature, ethical and ecological issues)

bsc_ideas Articles