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Strategic Enterprise Management with the SAP Balanced Scorecard

by Marcus Wefers | SAPinsider

January 1, 2001

by Marcus Wefers, SAP AG SAPinsider - 2001 (Volume 2), January (Issue 1)
 

The Balanced Scorecard (BSC) is an instrument that provides the framework for distributing the enterprise’s resources to match the business strategy. The SAP Balanced Scorecard is covered in SAP Strategic Enterprise Management (SAP SEM) solution.

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:

  1. Ability to implement the enterprise strategy
  2. Credibility/ability of management
  3. 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 Management

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 new insights.

     Kaplan and Norton see the Balanced Scorecard as a strategic management concept that involves:

  1. Developing transparently formulated strategies
  2. Communicating the strategy within the entire enterprise
  3. Coordinating the enterprise strategy with the goals of the staff
  4. Linking objectives with the annual budget
  5. Identifying and coordinating strategic initiatives
  6. 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
  • Benchmarking
  • 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 Warehouse (BW).

Figure 1 Overview of the SEM Balanced Scorecard for the Pharmaceuticals SBU

Basic Elements of the Balanced Scorecard

The basic elements of any Balanced Scorecard are:

  • Strategies
  • Objectives
  • Measures
  • 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.

Figure 2 Strategies and Objectives in the SEM Balanced Scorecard

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 related.

     Let’s take a look at each perspective and the questions you need to answer to achieve the overall goal of increasing shareholder value.

Figure 3 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.

Financial Perspective

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 owner.

     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.

Figure 4 Key to Values in the Balanced Scorecard

Cascading Scorecards

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.

Figure 5 Cascading Scorecard

Strategy Map

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.

Figure 6 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 initiatives.

Figure 7 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 8).

Figure 8 SEM Balanced Scorecard Measure Tree for Economic Profit

Strategy Templates

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 components:

  • 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.

Figure 9 Focus Strategy: Product Innovation

Conclusion

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, among others.

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