Translating Strategy into Shareholder Value: A Company-Wide Approach to Value Creation

Robert S. Kaplan and David P. Norton developed the Balanced Scorecard. It was designed to more effectively turn strategic plans into action. The scorecard creates a way to measure performance in strategic terms. It is not only a way to benchmark the performance of a company, but it is a process as well. The scorecard involves continual evaluation of four key areas, or quadrants, as well as assessment of the actual metrics themselves. The process occurs at all levels of management. The four quadrants are financial, customer, internal business process, and learning and growth, which were identified by Kaplan and Norton as areas that are key to business success (Exhibit 5-5).

Exhibit 5-5: The Balanced Scoreboard.

The Financial Quadrant

The financial quadrant of the scorecard measures performance in three major categories: 1) revenue growth, 2) productivity, and 3) return on investment. These categories are linked to the maturity of your business. The maturity of a business closely parallels the development of industries. Jackson proposes three stages of the industry lifecycle.^[1] Financial metrics are summarized in Exhibit 5-6.

Exhibit 5-6: Financial qudrant representative metrics.

• Pioneer. This is the nascent stage of an industry, characterized by high growth in revenues and heavy investment. The Internet sector in the late 1990s is representative of this stage. During this time period, thousands of websites were launched and investment capital was flooding in from private and public sources. Some examples of metrics used to measure financial success are percentage revenue growth, revenue per employee, and revenue turnover (revenue/assets).

• Expansion. As initial growth moderates, industries move into the expansion phase. The financial focus begins to shift toward earnings. The inflow of capital declines as the markets recognize that the prospect of meteoric growth is no longer possible. Performance indicators that are useful in this stage are revenue from specific markets, profit per employee, and return on assets.

• Stabilization. In this stage, growth becomes comparable to the economy as a whole and improvement in earnings is driven by productivity and management of costs. The emphasis begins to shift toward measurement of earnings and return on equity. Management emphasizes cost control and minimizing the capital required to run the business. Measurements used for financial success in the stabilization stage include revenue by product, unit cost, and return on equity.

The Customer Quadrant

Businesses that do not understand their customers and markets will ultimately fail. The core measurements in this group are shown in Exhibit 5-7, with respective examples based on a community bank.

Exhibit 5-7: Customer quadrant measurements.

The Internal Business Process Quadrant

Kaplan segments business processes into three basic categories: 1) innovation, 2) production, and 3) postsale service. Exhibit 5-8 shows metrics that can be used to measure the contribution of these processes to shareholder value.

Exhibit 5-8: Internal business process metrics.

The Learning and Growth Quadrant

"The objectives of the learning and growth perspective provide the infrastructure to enable ambitious objectives in the other three perspectives to be achieved".^[2] Kaplan and Cooper believe that this area is the key to long-term growth. This quadrant is centered around three areas: 1) employee capabilities, 2) information system capabilities, and 3) motivation, empowerment, and alignment. As mentioned throughout this book, these areas have been overlooked in the past because they have not shown tangible contributions to the bottom line. Lack of attention to learning and growth is similar to avoiding regular maintenance and repair on your home. Initially, the effects will not be readily apparent, but may over time build to dramatic proportions. Just like a small water leak can destroy a wall, lack of alignment (goal sharing) and motivation will have devastating effects on a company's ability to be productive and generate shareholder value. Unfortunately, these areas are the most difficult to measure. Organizational constructs are difficult for traditionally trained managers to understand. Managers have a high degree of comfort with "hard" metrics such as time, costs, and revenues. These can be tied directly into the financial performance of the company. It is difficult to link employee satisfaction with cost control or sales. These relationships are anecdotal at best; for example, "Disgruntled employees will not treat your customers well because they are unhappy".

Some of the same conceptual fuzziness with learning and growth is prevalent in evaluating technology. Assessing the performance of the technological infrastructure can be straight forward (e.g., system downtime). The challenge arises when trying to understand how well technology meets the requirements of the business. Exhibit 5-9 shows metrics for the learning and growth quadrant.

Exhibit 5-9: Learning and growth metrics.

^[1]Charles P. Jones, Investments, Analyses, and Interpretation, 7th Edition (New York: Wiley & Sons, 2000), pp. 369–371.

^[2]Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996), p. 126.