ADRIANA CAPRARU
Entrepreneurship & BA (en), group 1
Redesigning the Balance Scorecards in the innovation economy
1.Balanced Scorecard & business strategy
1.1 Introduction
1.2 Performance management systems – Balanced scorecards a short history
1.3 The 4 perspectives: Financial, Customer, Internal business Process Perspective and Learning and growth perspective
1.4 Balanced Scorecard in Romania
2. Performance measurement and innovation.
2.1 Innovation Balanced Scorecard
2.2 Types of innovations: Routine (Incremental)/ Radical Innovation
2.3 Pro and Cons of Innovation Balanced Scorecards
3. Case study: innovation performance management in Romania
4. Conclusion
Status
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When
Bibliography
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abstract
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Balanced scorecards Pro & cons
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Case study (final reviews)
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Conclusion case study
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Images references
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Final conclusion
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Final revisions
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Abstract [TBD]
Keywords: Innovation management, Innovation performance measurement, radical and incremental innovation
Introduction
Strategy execution is the main topic for chief executives today. Bain & Company, a global management consulting firm, has chosen the Balanced Scorecard (BSC) as one of the 10 most used strategic management tools. According to 2CG, a strategic execution consultancy firm, 87% of the executive managers use the Balanced Scorecard to influence business actions. 31% of the companies included in the surveys reported that BSC is an extremely helpful tool, and 42% as very helpful. The Balanced Scorecard has developed over the last eleven years as a powerful tool to implement strategy and monitor strategic performance.
The Balanced Scorecard is a strategic control system that balance between financial and non-financial metrics but also between internal and external factors affecting business strategy. It clarifies and gains consensus about strategic goals, tracks individual and collective performances, and defines and communicates company goals to its internal and external stakeholders. (Ondrej Zizlavsky, Journal of Technology Management & Innovation vol.9 no.3 Santiago 2014)
“If you can’t measure it, you can’t manage it.”, an old adage says. In the end, effective performance management requires accurate performance measurement.
This is true also for innovations where it is important to bring intelligibility and discipline, mainly to the initial stage of the innovative process. Companies are constantly creating changes in their products and processes and gathering new knowledge (Ondrej Zizlavsky, 2014). Measuring such a dynamic process is much more complex than a static activity.
Innovative activities are very expensive and they block a substantial part of resources for a long period of time. Effort and resources must be recovered if the company want to survive in the strongly competitive environment. Therefore. the need of management control systems is crucial in innovations.
This paper describes the evolution, and key perspectives of the Balanced Scorecard and the way it can be used in order to translate innovation into a story success.
1.2 Performance management systems – Balanced scorecards a short history
The Balanced Scorecard has developed in the late 1980s and early 1990s as a very useful managerial tool which help the companies to manage their increasingly complex business environments.
By the late 1980s, corporations were facing new difficulties: vanishing market share in many industries because of globalization, liberalization of trade, technology innovation. The economy was experiencing significant shift of paradigm from product-driven to service-driven.
Despite all these changes, most organizations still relied on traditional measures of performance based on an old accounting model (financially driven), which neglected to reflect the real situation of the company and also to translate future opportunities.
Improving short-term financial performance might be unfavorable to the future financial health of the company just as doing poorly from a financial perspective because the company invest in the core capabilities could lead to superior future performance.
Purely financial indicators offer a good interpretation of the past performance results, however don’t give a reliable indication of future performance.
In light of these difficulties, Robert Kaplan and David Norton shaped the concept of the Balanced Scorecard in the late 1980s, during a research project.
The results were published in 1992 in the Harvard Business Review. Encouraged by the positive reaction to their initial article, Kaplan and Norton build up the concept of the Balanced Scorecard, and published The Balanced Scorecard in 1996.
By that time, the focus of the Balanced Scorecard had evolved from a system focusing on measures and reporting, to a methodology for translating organization’s strategy. In 2000, Norton and Kaplan published their second book, The Strategy Focused Organization, focusing on a more general concept of strategic management.
Therefore, Balanced Scorecard emerged as a performance management system and evolved into a strategy management system offering support to the business leaders to meet the challenge of strategy execution.
Although Kaplan’s and Norton papers are the best known for popularizing this concept, organizations have used frameworks comprising a mix of financial and non-financial indicators to track progress for quite some time. One such system was made by Art Schneiderman (1987) at Analog Devices (a medium-size semi-conductor company). Schneiderman's design was similar to what is now called as a First Generation Balanced Scorecard design.
In 1990 Art Schneiderman participated in a research study led by Robert S. Kaplan in collaboration with US management consultancy Nolan-Norton, and during this study described his work on performance measurement. Kaplan and David P. Norton included details of this balanced scorecard design in a 1992 article. Kaplan and Norton's article wasn't an unique contribution on the topic, however it turned into the most popular (see Eccles, 1991)
But the roots of performance management as an activity can be found in the emergence of the complex american organisations during the 19th century. French process engineers made the tableau de bord – (a performance dashboard) – in the beginning of the 20th century.
The first generation of balanced scorecard designs (fig1) utilized 4 perspectives to identify what measures to use to track implementation of strategy.
● Financial perspective: answer the question How do we look to shareholders? and encourages the identification of a few relevant high-level financial measures (by instance cash flow, sales growth, operating income etc.)
● Customer perspective: answer the question How do customers see us? Between indicators we could count percent of sales from new products, on time delivery, share of important customers’ purchases, ranking by important customers.
● Internal business processes: answer the question What must we excel at? By e.g. unit cost, yield, new product launched
● Learning and growth: answer the question How can we continue to improve, create value and innovate? and propose indicators as time to develop new generation of products, product life cycle, time to market versus competition.
Justifying the choice of measures made was the main challenge faced by this type of BSC.
Fig. 1 First model BSC (Kaplan &Norton)
In the mid-1990s, an improved design method emerged. In the new design, measures are chosen based on a set of strategic objectives organized on a strategy map. The strategic objectives are placed into 4 measurement perspectives to form a visual presentation of strategy and metrics.
Fig2. Second generation of BSC- Strategic linkage model
In this modified version of BSC, managers select just a couple of strategic objectives within each of the perspectives, and after that define the cause-effect chain among these objectives by interlinking them to create a strategic linkage model. A BSC of strategic performance measures is then inferred directly by selecting 1 or 2 indicators for each strategic objective. This type of approach provides more relevant justification for the measures chosen, and make that task easier for managers. This style of BSC has been currently used since 1996.
In the late 1990s, the design had evolved once more. The second generation design comprising in the plotting of causal links was a pretty abstract activity. In practice it failed connect with the current management activity and to influence strategic goals. A new design element was added – Destination Statement.
The first Destination Statement was generated as an estimate of the consequences of implementing the strategic objectives at a particular moment in the future (e.g. in 3 years time). By agreeing how much of key elements would have been achieved by this time (e.g.revenue, customer satisfaction, etc.) it could be easier to check/set for a consistent set of annual targets.
The design process was reversed, Destination Statement being the first design activity, instead of the final one. The selection of strategic objectives and causality assumptions were made much easier, and agreement could be achieved faster.
This new BSC generation brings more relevance and functionality to strategic objectives. But the main differentiator remains the incorporation of Destination Statement. Strategic objectives, strategic linkage model and perspectives, measures and initiatives are other key components.
1.3 Balanced Scorecard: The Four Perspectives
In the current business environment, management strategies implementation should be backed up by integrated performance measurement systems that catch changes in financial and non-financial measures. Financially-driven traditional accounting control systems have important limitations. (missing non-financial factors, alignment to corporate strategy, looking only at the past events).
As stated in 1.2 chapter, the Balanced Scorecard translates Mission and Vision statements into a set of objectives and measures that can be quantified. These measures typically include the following 4 perspectives (Advanced performance Institute):
● Financial perspective – Focuses on financial performance of an organisation. It is important to note that financial performance is generally the consequence of good performance in the other three scorecard perspectives. Kaplan and Norton sustain that the specific goals rely on upon the company's stage in the business life cycle. For example: Growth stage – the goal is growth such as revenue growth rate; Sustain stage – the goal is profitability such ROE, ROCE and EVA; Harvest stage – the goal is cash flow and reduction in capital requirements
● Customer perspective – Focuses on performance targets as they relate to customers and the market. It usually covers customer growth and service targets, net promoter scores (NPS) as well as market share and branding objectives. Low performance in this perspective might cause a decay of business even if current financial and other perspectives are performing well.
● Internal business process performance – focuses on internal operational goals and covers objectives that relate to the key processes necessary to deliver the customer objectives. Examples of KPIs: process improvement, quality optimization and capacity utilization, timeliness, productivity rates. Innovation performance is assimilated to this perspective by some authors as an entry stage for the value chain model.
The learning and growth perspective – focuses on the intangible drivers such as the capabilities of people and is often splited into the following components:
● human capital (skills, talent, and knowledge)
● information capital (databases, information systems, networks, and technology infrastructure)
● organisation capital (culture, leadership, employee alignment, teamwork and knowledge management).
Some examples of KPIs in this dimension are staff engagement, skills assessment, performance management scores.
Balanced Scorecard in Romania
In Romania, organisations don't have an integrated approach when it comes to the practices of performance management, which leads to an inadequate use of performance measuring systems based on KPIs. These systems are generally implemented ad hoc only in certain departments considered particularly important to the company and most of the time they are not aligned to the company's strategy.
The monitored KPIs in Romania are mostly of financial nature, such as business turnover, profit or the gross profit – operating expenses ratio. The use of performance indicators up to an individual level started to take shape in the early 2000s and has accelerated in the recent years.
"The KPIs monitored by these companies measure a series of critical non-financial aspects for the company's activity, aiming to assess the degree to which and the way that a strategy is executed. Generally, the KPIs chosen are related to customer relationship, optimizing internal processes and developing the human capital. From a client perspective, among the most frequently used KPIs are client satisfaction, market share, new customers or even net promoter score", explains Adrian Brudan from Acumen Integrat, a Romanian consultancy company.
In terms of internal processes, the most frequently used key performance indicators are those regarding: in time deliveries, prospects conversion rate, average time of handling orders/calls, etc. In terms of measuring and improving the human capital performance, the most often employed KPIs look at client satisfaction, engagement level and training hours per employee.
"There are organisations like OMV Petrom, Scandia Food or Ambient Sibiu that have implemented management performance systems aligned at all organisational levels: startegic, operational and individual. Although their number is still limited, there is an upward trend in developing the capabilities of performance management", points out Adrian Brudan.
Mihai Stoica, Managing Partner at Humans, states that the number of companies setting by themselves their KPIs is approximately the same as the number of companies that choose external consultants for this process.
"There is a connection between KPIs and management by objectives, which translates into an action track that begins with the company's strategy and the setting of KPIs for top management to execution level, but there are companies that start the other way round, from the execution level to the strategic part", emphasises Mihai Stoica.
In the study report "Performance Management in Romania 2011", published by Acumen Integrat almost 51% of company representatives affirm they use Microsoft Office (Microsoft Excel, Word or PowerPoint) for monitoring and reporting performance results, a percentage which is considered to be high.
The Acumen study was conducted online with 258 respondents during July – September 2011.
According to the cited Acumen study, over 32% of participating companies have been investing for 3 years in adopting and using instruments of performance management systems, and 17,8% already began to focus their interest on performance management over three years ago.
Mihai Ionescu, from Balanced Scorecard Romania, estimate the BSC adoption rate of approximately 3-4% in SMEs (<250 employees), 7-8% in medium size companies (250-1,000 employees) and 15-20% in big companies (>1,000 employees). The same remark applies here, which is that most companies implement this only partially, predominantly with the purpose of operational monitoring and reporting, in any case not according to the formal Kaplan-Norton BSC framework (XPP – Execution Premium Process), as a Strategic Management System.
In the public sector, the most notable exception is the implementation of BSC by the Government (20 ministries).
Innovation performance measurement – ‘from a strategy of hope to a more tightly managed innovation approach’*.
Innovation is a creator of economic value and a driver of competitive advantage. Businesses that fail to innovate run the risk of losing ground to competitors, or simply operating inefficiently. Together with the current imperative for innovation comes also the need to accurately measure a company’s innovation activities. Without measurements, investment decisions remain speculative, nobody knows the added value created by innovation and why an excellent strategy is not implemented in practice.
However, wrong metrics may lead to short-term, and risk-avoiding decisions and actions (Muller et al, 2005; Hauser & Zettelmeyer, 1996; NetQoS,2005).
Therefore, selecting the right metrics for each innovation project is vital. Each organization choose the innovation metrics depending on their strategic objectives. However, many generic metrics will be similar within a given industry.
Kaplan and Norton stated the importance to ‘link performance measurement with the strategy of the company in order to provide business value’ (Kaplan and Norton, 1992; Neely 2005; Micheli et al. 2010).
When measurement systems are not aligned with the strategy and not adapted to the innovation portfolio’s mix of incremental, semi-radical, and radical innovation, ‘managers can lose important information that translates into lower performance and decreased payoffs from innovation investments’. (Epstein, Davila, Shelton,102)
‘Despite the extensive amount of research, measuring and assessing innovation performance, innovation measurement and management remains a problematic area in companies’ (Adams et al 2006; Kianto 2008) which becomes an even greater challenge when considering the need to accomplish both incremental and radical innovation.
There is often assumed that innovation depends on intangibles such as creativity and ‘only recently have companies moved from a strategy of hope to a more tightly managed innovation approach’. (Global Innovation Center)
Most of the companies are using traditional financial metrics for portofolio evaluation, which are less suitable because data on innovation output and outcome are difficult to characterize and predict at distant in time (Christensen et al., 2008). This is particularly true for innovations of radical nature which leads to companies undertaking more familiar approaches to existing products and processes i.e. incremental innovation.
Used alone, the financial metrics evaluate profits in the short-term but sacrifice the future (Hauser & Zettelmeyer, 1996). In complex projects, such as radical innovation, financial returns occur with a significant delay, and it is rather difficult to identify the innovation’s role from other business activities in terms of overall performance.
Analyzing innovation only through financial metrics, encourage meeting budgets and avoid risk and entrepreneurial behavior. Risk aversion and short-term preferences lead to a “false rejection” (short-term projects with concrete results are always preferred when compared to projects with a much higher value to the company in the long-term) (Hauser & Zettelmeyer, 1996).
Uncertainty are at the core of the innovation task and measurement systems have to grasp these unique features.
Yet financial based innovation metrics cannot be rejected because they are critical to ensure organization’s health in the short-term. A complex model which combine several metrics giving the right place to the financial metrics is required and the perfect choice in order to avoid false rejection.
In practice, the challenge is to identify the right measures in order to evaluate both the results of innovation activities and the efficiency of processes in getting new ideas commercialized (Smith 2005; Adams et al 2006; Christensen et al. 2008).
The Innovation Balance Scorecard
The Balanced Scorecard is among the most popular models which has inspired similar approaches also within R&D and innovation management (Kerssens-van Drongelen and Bilderbeek 1999; Adams 2007). Adapting this model and transforming it into a measurement framework applicable to innovation processes can result into an Innovation- Balanced Scorecard.
The combination of the traditional BSC with innovation metrics results in an innovation scorecard that measure the value added by innovation but also align innovation projects with strategic objectives.
Innovation Balanced Scorecard can become a perfect management tool for measuring and managing many different aspects of innovation: ‘translate and execute the innovation strategy, evaluate investment proposals, align projects to strategy, understand the sources of value, measure the value created by projects‘etc. Furthermore, an Innovation Balanced Scorecard model can be used to measure all types of innovation within the company’s portfolio (incremental, radical, semiradical)
As stated in the first part of this paper, this framework provides 4 perspectives for measurement: financials, internal business (processes), innovation and learning, and customer. The rule is to have at most 5-7 measure per perspective in order to stick to the big picture and not be lost in the details.
Financial Perspective present financial results of the innovation that can be translated into a growth in income and/or a cost savings. It is necessary to identify the source of the growth: (Antonio Diaz, 2012, 69)
● Income through new business models, products and current services as well as new products and services added
● Cost savings resulting from process improvement
Also each company should assess the risk level for each of these new business models.
The Client Perspective represents the uniquely value proposal for the client that should transform into an increase in market share or in client loyalty.
The Internal Perspective could include the following 3 strategic lines that will bring value for the client:
1. new business models or innovation platforms around which new products and services can be built.
2. development of the processes that support the 3 phases of innovation:
a) idea generation
b) idea developement
c) ideas adoption and commercialization
Objectives regarding time and resources allocation in each of these three phases are parts of an integrated management portfolio of innovative projects and programs. Risk and opportunity are weighted and assessed to the portfolio level, mixing the incremental development of projects with totally new platforms and business models (radical). One of the KPI’s to evaluate the whole portfolio of innovation projects is the Actual Net Value.
3. strategic line of supply and alliances – reflects the partnerships needed to innovate, which decrease the time to market of products and services.
The Strategic Map of Innovation should contain the development of processes which goal is to form to alliances and alignment suppliers or partners.
Learning and growth perspective map objectives related to the culture and organization in order to make innovation real (abilities and skills and the development of an organizational culture that value these skills).
The Innovation Balanced Scorecard oblige organizations to identify and define a consistent portfolio of innovation metrics related to their strategy, such as number of ideas generated, growth of market share, ROI of new products etc (Miguel Mira da Silva,)
The specific metrics for innovation depend on how an organization consider innovation: either to increase results from innovation or to align innovation to strategy, as complement to strategy.
The Strategic Map of Innovation will then structure a set of objectives based on all the four perspectives, connected together by cause-and-effect relationship and that are accomplished in the financial perspective.
In order to develop an innovative business, it is not only about building a set of processes, but to take find a more broad framework. The Balanced Scorecard has been used successfully to translate any type of strategy in businesses, and can also be used to implement an innovation strategy. It’s a framework that can be used to measure all types of innovation, as we will detail in the following section.
2.3 Innovation portfolio. Types of innovations: Routine (Incremental)/ Radical Innovation
If including the innovation in a company’s strategy is concluded, remains to build the portfolio with different types of innovation. Which types of innovation will allow the company to create and capture value and how these types translate into an Innovation Balanced Scorecard depends of the company’s profile (industry).
Metrics of innovation will be look different in function of the innovation types. By instance, metrics for an incremental innovation within a manufacturing industry are different ‘than those for a radical innovation within a software company’ (63). However, the business model should outline in a clear manner what resources are required and how they are combined to create innovation and how the innovation translates into business value.
Innovation mean different things to different people. Two main categories of innovation are defined in the literature: incremental and radical innovation. Variations between these 2 types are also present in litterature (by instance, semi-radical innovation)
Incremental innovation is the most current form of innovation in most companies and is a way to pull out as much value as possible from existing products or services without having to make significant changes or major investments. Incremental innovation focuses to small improvements to existing products and business processes or services. We may think that incremental innovation it’s a minor process in the equation, but in fact is the main type generator of revenue.
It provides protection from the market share erosion and profitability. Through incremental ‘improvements in technology and/or the business model’, a company can sustain its product market share and profitability for a longer time. (Davila, Epstein)
Companies often become addicted to incremental innovation and its relative safety only to find that they can’t venture beyond it even if they urgently need to.
The issue with incremental innovation is that ‘it represents constrained creativity’, where only small changes are allowed, and it frequently turns into the prevailing form of innovation and eliminate other more valuable changes. (Davila, Epstein)
At the opposite end, radical innovation is shaping completely new processes or products in response to a market opportunity. This type of innovation tend to be the result of careful research and development into a specific issue and can change the entire way an organization works and, can impacts an entire market sector.
A radical innovation is a significant change that affects both a company’s business model and technology. Radical innovations usually bring fundamental changes to the competitive environment in the industry.
Translated into financial terms, the radical innovation can give the entire company an important competitive advantage.
Radical innovations are low-probability investments so investments in this area should be approached carefully. Still radical innovation is the only one to totally change the paradigm into a particular industry and put the company in the lead for a longer period of time.
As a processes, Radical innovation requires ‘strong bottom-up commitment and involvement in the initiation and strong structured, top management support close to commercialization’ (O´Connor and DeMartino, 2006) ‘whereas for incremental innovation the direction and objectives are set from start’ (Bessant 2005).
Managing both radical and incremental innovation are generating some challenges when designing and using innovation performance measurement as well when allocating resources to support each of types. Also the 2 types of innovation contain important dichotomies resulting from inherent characteristics such as different structure, process, strategy, and culture in the company (McDermott and O’Connor 2002; He and Wong 2004) with different impacts on business performance. These dichotomies provide a challenge for the measurement as well, if we consider the close relationship between management and measurement.
In practice, theses dichotomies translates into issues concerning the design and use of innovation performance measurement when managing both radical and incremental innovation.
Investing in too much radical innovation can waste precious resources that could be better used on incremental innovations. A balanced portfolio of radical innovations and incremental innovation can bring the desired balance so that the investment matches the business needs.
BALANCED SCORECARDS – PRO & CONS- [TBD]
4.1 Balanced Scorecard Strengths
BSC is a multidimensional tool that help measuring and managing performance while translating the business strategy. Several benefits are listed in favor of BSC:
– this framework provides 4 perspectives for measurement, a more balanced view of the performance, than a unique set of indicators. BSC gives you a clear indication as to whether the organization as a whole is meeting its objectives.
– assessing performance only through financial metrics may fake the reality (the company is doing well financially, but the customer dimension or internal processes are not performing).
– a helpful tool for stakeholders which can determine the health of a business easier just by looking at the short, medium and long term objectives.
– the separation of KPIs into sets of leading and lagging (providing delayed information) indicators.
4.2 Balanced Scorecard Limitations
The utility of the balanced scorecard (BSC) for innovation processes is debatable. In a paper written by Voelpel, Leibold and Eckhoff, “The Tyranny of the Balanced Scorecard in the Innovation Economy” (26), they consider BSC as outdated as the needs for business change constantly. The authors list some main issues with the BSC:
● Rigidity: BSC place everything into 4 perspective model (Financial, Customer, Internal Business, Innovation and Learning)
● External innovative connectivity is hindered
● Difficulty to deal with challenges of competitive and fast moving business world.
● Dealing with knowledge creation, learning and growth is limited
● Mechanistic mindset.
The BSC is not fit for the new innovation economy and hinder its dynamic because of the rigidity and the centric view of the company. The challenge would be to test a more integrative concept, that would take into consideration other crucial aspects –thus, to propose a systemic scorecard as an alternative.
BSC loose from sight the competition or technological development being too focused on the 4 dimensions. (Kennerley & Neely, 2003)
It’s a static framework that does not take into consideration inherent risks involved in the events that can threaten the strategy on which this is based. (Norreklit, 2003).
Davies (2007) points out the danger of establishing "narrow goals", not realizing that to achieve it is necessary to obtain adequate levels of organizational capabilities and competences.
Work in progress….
Introduction
Strategy execution is the main topic for chief executives today. Bain & Company, a global management consulting firm, has chosen the Balanced Scorecard (BSC) as one of the 10 most used strategic management tools. According to 2CG, a strategic execution consultancy firm, 87% of the executive managers use the Balanced Scorecard to influence business actions. 31% of the companies included in the surveys reported that BSC is an extremely helpful tool, and 42% as very helpful. The Balanced Scorecard has developed over the last eleven years as a powerful tool to implement strategy and monitor strategic performance.
The Balanced Scorecard is a strategic control system that balance between financial and non-financial metrics but also between internal and external factors affecting business strategy. It clarifies and gains consensus about strategic goals, tracks individual and collective performances, and defines and communicates company goals to its internal and external stakeholders. (Ondrej Zizlavsky, Journal of Technology Management & Innovation vol.9 no.3 Santiago 2014)
“If you can’t measure it, you can’t manage it.”, an old adage says. In the end, effective performance management requires accurate performance measurement.
This is true also for innovations where it is important to bring intelligibility and discipline, mainly to the initial stage of the innovative process. Companies are constantly creating changes in their products and processes and gathering new knowledge (Ondrej Zizlavsky, 2014). Measuring such a dynamic process is much more complex than a static activity.
Innovative activities are very expensive and they block a substantial part of resources for a long period of time. Effort and resources must be recovered if the company want to survive in the strongly competitive environment. Therefore. the need of management control systems is crucial in innovations.
This paper describes the evolution, and key perspectives of the Balanced Scorecard and the way it can be used in order to translate innovation into a story success.