By Gumbus, Andra; Lyons, Bridget
Strategic Finance , Vol. 84, No. 5
When a management tool becomes popular, it's only logical to question whether it's a fad or the future. One performance measurement tool--the balanced scorecard (BSC)--has broad appeal. Approximately 50% of Fortune 1,000 companies in North America and about 40% in Europe use a version of the BSC, according to a recent survey by Bain & Co. The number of software and consulting firms currently providing BSC-related products and services supports these statistics. But do companies think the BSC is here to stay? Philips Electronics does. This worldwide conglomerate has gathered its more than 250,000 employees in 150 countries around the card because it sees this tool as the future-not a trendy tool. The key benefit for Philips: Management can streamline the complicated process of running a complex international company with diverse product lines and divisions. Here's how it cascades throughout the organization.
The drive to implement the balanced scorecard at Philips Electronics came from the top down--as a directive from the Board of Management in Europe to all Philips divisions and companies worldwide. The directive went to each of the companies and their quality departments, with the effort in the medical division headed by the Quality Steering Committee that reports to the president of Philips Medical Systems. (Later we'll look specifically at the experiences of the Philips Medical Systems North America (PMSNA).)
Philips Electronics has used the balanced scorecard to align company vision, focus employees on how they fit into the big picture, and educate them on what drives the business. An essential aid to communicating the business strategy, the BSC works as a vehicle to take key financial indicators and create a quantitative expression of the business strategy. In fact, Philips Electronics' management team uses it to guide the quarterly business reviews worldwide in order to promote organizational learning and continuous improvement.
THE ROAD TO IMPLEMENTATION
Philips' underlying belief in creating their balanced scorecard is that understanding what drives present performance is the basis for determining how to achieve future results. With this understanding in mind, Philips designed the scorecard to provide a shared understanding of the organization's strategic policies and vision of the future. Their operating principle in the design was to determine factors that were critical for achieving the company's strategic goals.
The tool has helped Philips Electronics focus on factors critical for their business success and align hundreds of indicators that measure their markets, operations, and laboratories. The business variables crucial for creating value, which are known as the four critical success factors (CSFs) on the Philips Electronics BSC, are:
Competence (knowledge, technology, leadership, and teamwork)
Processes (drivers for performance)
Customers (value propositions), and
Financial (value, growth, and productivity).
Here's how these critical success factors came to life at the company.
Top-level scorecard criteria are the driving determinant for lower-level scorecard criteria. Philips wanted to make implicit assumptions about the way the business creates value explicitly through CSFs. In other words, the goal was to translate assumed relationships such as customer satisfaction and product sales into critical success factors to measure performance. To do so, they identified which financial and customer CSFs give a competitive edge, and then they determined the process CSFs that have the greatest impact on the financial and customer CSFs giving the company that edge. Competence CSFs deliver required process, customer, and financial results.
To express the strategy in measurable objectives, the team established a performance management system that measures progress toward the corporate vision. This system links short-term actions with long-term strategy so employees understand how their day-to-day activities help achieve the company's stated goals. …