Over the past several years, a number of new management techniques have
been introduced to increase enterprise productivity. Procedures like TQM
(total quality management), process reengineering, outsourcing, and core
competencies have resulted in much more efficient business processes.
Surprisingly, these improvements often failed to achieve a permanent increase
in profitability. At the same time, companies are increasingly focused
on shareholder value as they compete for increasingly scarce capital.
These two business trends — new management
techniques and emphasis on shareholder value — demonstrate the need for
strategic enterprise management that addresses the competition for both
customers and capital.
Shareholder value and qualitative information
about the enterprise play increasingly important roles. It is becoming
clear, for example, that institutional investors and analysts now derive
their company ratings from shareholder value-based models — models based
on quantitative forecasts of the most important value drivers.
Non-financial information is also taken
into account: according to a 1998 study by the international consulting
firm Ernst & Young, portfolio managers gave non-financial information
a weight of up to 35 percent in their investment decisions. Of 38 identifiable
influencing factors for investment decisions, the top three were:
- Ability to implement the enterprise strategy
- Credibility/ability of management
- Quality of the enterprise strategy
Arthur Andersen, in a 1996 study, also
found a close relationship between the communication strategies of investor
relations departments and the investors’ buy recommendations.
Together, the two studies show that the
enterprise not only must balance financial and other key figures, but
also should focus on the implementation of business strategy. Both
aspects are elements of the Balanced Scorecard concept.
Balanced Scorecard Approach and SAP Strategic Enterprise
The Balanced Scorecard (BSC), a concept introduced by Robert Kaplan and
David Norton, is an instrument that helps divide your enterprise’s strategy
into separate, operative business processes and makes it executable on
all levels of the enterprise.
The Balanced Scorecard provides the framework
for distributing the enterprise’s resources to match the business strategy.
By assigning specific personal responsibilities for each objective, you
can regularly collect evaluations of the persons involved and thus track
the success of the implementation — rather than conducting a periodic
or annual review of the business strategy — which, in many cases, offers
Kaplan and Norton see the Balanced Scorecard
as a strategic management concept that involves:
- Developing transparently formulated strategies
- Communicating the strategy within the entire enterprise
- Coordinating the enterprise strategy with the goals of the staff
- Linking objectives with the annual budget
- Identifying and coordinating strategic initiatives
- Holding regular performance reviews, with feedback and any necessary
adjustment to the strategy
The SAP Balanced Scorecard was the first
Balanced Scorecard solution to be certified by the Balanced Scorecard
Collaborative in late 1999.¹ It is important to note that the Balanced
Scorecard concept should be closely linked with other analytical applications
that together form the strategic enterprise management of an enterprise.
In SAP’s case, the Strategic Enterprise Management (SEM) solution covers
the Balanced Scorecard along with the following areas:
- Management Cockpit
- Strategic Planning
- Dynamic Simulation
- Activity-Based Management
- Performance Measurement
- Financial and Management Consolidation
- Business Information Collection
- Stakeholder Relationship Management
Figure 1 provides an example of
the SEM Balanced Scorecard interface for the Pharmaceuticals strategic
business unit (SBU). In order to ensure data consistency from various
sources, SAP SEM is closely integrated with the SAP Business Information
||Overview of the SEM Balanced Scorecard for the
Basic Elements of the Balanced Scorecard
The basic elements of any Balanced Scorecard are:
- Initiatives and Programs
The central focus of the Balanced Scorecard
is the strategies and their division into strategic objectives. These
objectives describe the different aspects of your strategy in detail.
The strategy illustrated in Figure
2, Drive Innovation, contains the financial objective Exceed
Growth in Key Segments. By integrating with the other individual objectives
(Build Strong Customer Relationships, Identify and Capture New Business
Opportunities, etc.), a cause-effect chain can be created.
The total set of objectives represents
the strategy. The strategy is implemented through initiatives and programs
that are allocated to the individual objectives. These initiatives are
the driving force behind implementing the strategy. Strategic initiatives
play a key role in allocating staff and financial resources, and thus
link the enterprise’s budget with its strategy.
The success of the implementation is tracked
by measures that are allocated to each objective.
||Strategies and Objectives in the SEM Balanced
The Four Perspectives of the Balanced Scorecard
Kaplan and Norton suggest considering any strategy from the following
four perspectives: Learning and Growth, Internal Process, Customer, and
Financial. Each perspective raises a specific set of questions and issues
to support the business strategy. These perspectives are listed in the
SEM Balanced Scorecard in the far left margin (as in the Balanced Scorecards
in Figures 1 and 2). Figure 3 reflects the four perspectives of
the Kaplan/Norton concept, the respective objectives, and how they are
Let’s take a look at each perspective and
the questions you need to answer to achieve the overall goal of increasing
||Four Perspectives of the Balanced Scorecard (Source:
Balanced Scorecard Collaborative)
Learning and Growth Perspective
Where do staff expertise and the infrastructure in your enterprise have
to be improved? Are employees sufficiently motivated, and does the working
environment support the change?
Internal Process Perspective
Which processes have to be improved to satisfy your customers? Identify
the critical business processes that have a lasting effect on customer
satisfaction and your financial targets. Customer Perspective What can
customers expect from the enterprise? Carefully select your value proposition:
product and service attributes, image, and customer relationships. The
strategy chosen in the customer perspective determines the future financial
performance of the enterprise.
Which financial result can be presented to the shareholders? Financial
objectives describe the long-term goals of your enterprise with regard
to return on capital, profitability, sales growth, productivity increases,
cost reductions, and risk management. The objectives of the other perspectives
ultimately lead to the Financial perspective and thus increase the value
of your enterprise.
Responsibility and Strategic Learning
The Balanced Scorecard concept assigns responsibility for a sub-area
of the strategy (e.g., an objective) to a particular manager or expert.
For example, in the strategy shown in Figure 2, Drive Innovation,
the manager of the research and development (R&D) department assumes responsibility
for the objectives Develop Key Skills and Improve Culture.
Experts from the R&D team assume responsibility for, or own, assigned
initiatives (Improve research facilities, etc.) and measures (Employee
satisfaction and retention, etc.). Ideally, responsibility for these
initiatives is linked to financial incentives, which are based on achievement
of the defined goals.
Those responsible for particular initiatives
and measures use the scorecard to track the implementation of the business
strategy. At periodic intervals, the objectives, initiatives, and measures
are subject to review, and analyses are run and recorded in the scorecard
as a verbal assessment.
Assessments become more effective when
they are based on the forward-looking expertise of those responsible,
which empowers you to detect and address deficiencies in the implementation
of the strategy early on. The status is indicated as an icon for each
objective and measure, as shown in Figure 4. These status indicators
can be set automatically by the system, or manually set by the responsible
Owners of an objective can use cause-effect
chains to estimate the influence of negative developments for the overall
strategy. A feedback system allows for the exchange of status information
and assessments that can be called directly from the objectives, initiatives,
and measures of the scorecard. In contrast to conventional reporting systems,
scorecard users have access to an interpreted view of the strategy from
the person directly responsible, with figures, facts, assessments, and
comments that allow for executive-level strategic learning.
||Key to Values in the Balanced Scorecard
The multi-scorecard concept of cascading scorecards (shown in Figure
5) helps you reveal strategies deep in the organization’s operative
departments, giving the business processes a strategic focus. Cascading
scorecards are useful instruments for coordinating the strategies of individual
strategic business units (SBUs) in large enterprises with complex structures.
Corporate headquarters provide the framework with common objectives that
SBUs translate into individual objectives. This enables the SBUs to manage
individually formulated scorecards whose strategy is coordinated with
corporate — as well as a multi-SBU — analysis of the common objectives.
Most enterprises require both a focus strategy and other sub-strategies,
since it is hardly possible to devote equal focus to innovation, customer
intimacy, and operational excellence at the same time.
Figure 6 shows an organization’s
focus strategy (Drive Innovation) and two sub-strategies (Enhance
Customer Management and Maximize Operational Efficiency), as well
as all objectives and the status for each objective. This view of the
Balanced Scorecard is called a strategy map.
||Strategy Map for the SEM Balanced Scorecard
Analyses of Individual Strategies
The SEM Balanced Scorecard allows for interactive analysis of individual
strategies. In the left column in Figure 7, the selected strategy,
Drive Innovation, with the objectives distributed across the four
perspectives, are linked in a cause-effect chain. The center and right
columns show the assigned measures with planned and actual values, as
well as the “owner” assigned to the task. Additional value columns for
multi-year planning and forecasts can be added.
The respective status values are represented
by icons that can either be set manually, or generated automatically from
the plan/actual comparison. You can display the saved assessments and
comments at the touch of a button, as well as switch to a view with selected
||Strategy Map Including Cause-Effect Chain, Objectives,
and Detailed Measures and Values
Leading and Lagging Indicators
The measures used in the Balanced Scorecard should be a mixture of general
measures that are typical for the industry and value drivers. Measures
like profitability, market share, or customer satisfaction that gauge
the performance of past activities are called lagging indicators.
It is important to include them in the BSC, since they report on the status
of strategy implementation.
In comparison, leading indicators
provide information about activities that affect future performance.
The breakdown of measures into their components
and further into value Figure 6 Strategy Map for the SEM Balanced Scorecard
Figure 7 Strategy Map Including Cause-Effect Chain, Objectives, and Detailed
Measures and Values drivers can be visualized by measure trees (see Figure
||SEM Balanced Scorecard Measure Tree for Economic
The business strategies you choose depend greatly on the particular needs
of the industry orientation of your enterprise. Even so, it is still possible
to categorize the strategies used by enterprises in a given industry.
SAP SEM, in conjunction with the Balanced Scorecard Collaborative, has
developed industry-specific strategy templates. The templates distinguish
between focus strategies and sub-strategies, and contain the following
- A comprehensive strategy description
- Objectives for each of the four perspectives
- Cause-effect chains
- Suggestions for measures of all objectives
Figure 9 is an example of one of
these industry-specific templates for the pharmaceutical industry. In
the template, the strategy Product Innovation and the objective
Conduct applied research, breaks down into more detail, such as
“Achieve right balance between pure and applied research.” Possible measures
to track strategy implementation for this objective include number of
patents and percentage of budget invested in pure research.
Strategy templates can serve as a basis
for discussion when developing your specific strategies. These industry-specific
templates will be delivered as part of SAP SEM Balanced Scorecard and
can be easily customized to meet your individual requirements.
||Focus Strategy: Product Innovation
As shareholder value and non-financial, qualitative information play
a larger role in corporate competition, SAP’s SEM and its Balanced Scorecard
provide the tools and content you need to balance multiple goals and to
maintain and improve the health of your enterprise.
|¹ Balanced Scorecard
Collaborative, Inc. was founded by Robert
Kaplan and David Norton. For more information,
visit their Web site at www.bscol.com.
Marcus Wefers has been with
SAP AG since 1990. During this time, he has been
a Project Leader in the US and Japan. The focus
of his work has included Profit Center Accounting,
Performance Measurement, Value-Based Management,
Balanced Scorecard, and the Management Cockpit,