The following articie is the

third in a three-part series

featuring companies
that have implemented the
balanced scorecard.
Performance Measurement
THE
BALANCED
SCORECARD
AT PHILIPS ELECTRONICS
IT'S USED TO ALIGN COMPANY VISION,
FOCUS EMPLOYEES ON HOW THEY FIT
INTO THE BIG PICTURE, AND EDUCATE
THEM ON WHAT DRIVES THE BUSINESS.
BY ANDR A G U MB U S
AND B R I D G E T LY ONS
W
hen a management tool becomes popular, it's only logical to question whether it's
a fad or the future. One performance measurement toolthe 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 v^'orldwide conglomerate has gathered its more than 250,000
employees in 150 countries around the card because it sees this too! as the futurenot 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.
November 2002 I STRATEGIC FINANCE 45
J
The drive to implement the balanced scorecard at
Philips Electronics came from the top downas a direc-
tive 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 depart-
ments, with the effort in the medical division headed by
the Quality Steering Committee that reports to the presi-
dent of Philips Medical Systems. (Later we'll look specifi-
cally 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.
T H E R O A D T O I M P L E M E N T A T I O N
Philips' underlying belief in creating their balanced score-
card is that understanding what drives present perfor-
mance 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
fCSFs) 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 giv-
ing 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 sys-
tem links short-term actions with long-term strategy so
employees understand how their day-to-day activities
help achieve the company's stated goals.
In order to focus employees on the few vital goals and
business priorities, the BSC cascades down throughout
the organization. Top management initially deployed the
BSC by setting annual operational targets, which were
brought down through organizational layers as goals for
the divisions worldwide and objectives at the business
unit level. By deploying top-level CSFs throughout the
organization, goals can be clearly linked to the business
strategy as well as to all employees.
The Philips Electronics balanced scorecard has three
levels. The highest is the strategy review card, next is the
operations review card, and the third is the business unit
card. In addition, the plan is to implement another level
of the cardthe individual employee cardin 2003.
The corporate quality department created specific
guidelines for metric linkage for the entire company.
These guidelines state that all top-level scorecard critical
success factors for which the department is responsible
must link metrically to lower-level cards. Three criteria
were established to accomplish this. The first is inclusion:
Top-level CSFs must be addressed by lower-level CSFs to
achieve top-level metric goals. The second is continuity:
Critical success factors must be connected through all
levels, and lower-level measurements shouldn't have
longer cycle times than higher-level measurements. The
third criterion is robustness: Meeting lower-level CSF
goals must assure that higher-level CSF goals will be met
or surpassed. Goals in all card levels align with goals in
the next level above, and goals become fewer and less
complex as you drill down through the organization.
T H E B S C AT W O R K I N T H E B U S I N E S S U N I T S
At the business unit level, critical success factors were
developed for each of the four perspectives of the card
competence, processes, customers, and financial. They
established guidelines for the deployment of CSFs at low-
N o v e mb e r 2 0 0 2 I STRATEGI C FI NANCE 47
er levels in the company, stating that departments must
select CSFs for which the department has a major control
responsibility. These CSFskey BSC indicatorsmoni-
tor the implementation of the business strategy.
The management team of each business tmit reached
consensus on which CSFs distinguish the business unit
from the competition. They used a value map to derive
customer critical success factors by analyzing customer
survey data that reflected perceived performance relative
to the price for competing produas. Process CSFs were
derived by determining how process improvements can
deliver customer requirements. Competence CSFs were
identified by determining what human resources and
competencies were required to deliver the other three
perspectives of the card. Standard financial reporting
metrics were used as financial CSFs.
The next step was for each business unit to determine
key indicators at the business unit level that measure
critical success factors. Assumptions about relationships
between processes and results were quantified and per-
formance drivers determined. Targets were then set
based on the gap between present performance and
desired performance for the current year plus two and
four years in the future. The criteria: Targets must be
specific, measurable, ambitious, realistic, and time-
phased. Targets are derived from an analysis of market
size, customer base, brand equity, innovation capability,
and world-class performance.
Examples of indicators at the business unit level
include:
F I N A N C I A L
Economic profit realized
Income from operations
Working capital
Operational cash flow
Inventory turns
C U S T O M E R S
Rank in customer survey
Market share
Repeat order rate
Complaints
P R O C E S S E S
Percentage reduction in process
cycle time
Number of engineering changes
Capacity utilization
Order response time
Process capability
C O M P E T E N C E
Leadership competence
Percentage of patent-protected
turnover
Training days per employee
Quality improvement team
participation
48
Brand index
STRATEGIC FINANCE | November 2002
In cascading tbe card down from the organizational
level to the business unit level, six key indicators consis-
tently came to tbe forefront for all business units:
Profitable revenue growth,
Customer delight,
Employee satisfaction,
Drive to operational excellence,
Organizational development,
IT support.
These six key drivers relate to each other as well as to
the balanced scorecard's foiu: critical
success factors. Organizational
development and IT support
drive the competence per-
spective; customer delight
and employee satisfaction
drive the customer per-
spective; operational
excellence drives the
process perspective; and
profitable revenue growth drives
the financial perspective. And each
quarter tbe BSC metrics are used as the reporting format
for the review of each business unit's performance.
S U C C E S S E S A N D C H A L L E N G E S
Although there are many successful implementations at
the Philips companies, let's look at the implementation of
the balanced scorecard at Philips Medical Systems North
America (PMSNA). It served as an alignment tool to
focus on their strategic intent to become a $1 billion
company by the year 2001.
It simultaneously guided a cultural change effort to
increase accountability for results. Eventually the BSC is
expected to replace the monthly accountability calls to
the field office where sales are reported against forecasted
numbers. Another success for the card within this divi-
sion is the creation of an operational scorecard for action
planning and tracking results in real-time: Data are auto-
matically transferred from internal reporting systems and
fed into the online BSC report, which is immediately
accessible and contains the new results. An upcoming
enhancement to customer service and satisfaction report-
ing will be the automatic feed of data gathered by the
Gallup Organization into the online BSC report in a
similar fashion.
Finally, implementing the card responded to common
questions raised in the annual employee motivation
survey, such as "How does what I do every day fit into the
bigger picture of the compa-
ny?" The balanced scorecard
******
enables employees to under- "^^
stand exactly wbat they need to
do on a daily basis in order to
impact results.
Chris Farr, former vice president ot
quality and regulatory at PMSNA and
who was responsible for the BSC, says that
companies must get buy-in to the metrics
and share measures quarterly with all employ-
ees in order to succeed. "Management must give
full access to their employees" Farr says. "The
metrics must be shared and visible."
To share the metrics with employees. Philips Elec-
tronics uses trafGc-light reporting to indicate how the
actual performance compares with the target. Green
indicates meeting target, yellow indicates in-line perfor-
mance, and red warns that performance is below target.
The visibility of results using a traffic-light mode! means
ease-of-use with quick, easily recognizable metrics.
Philips Medical Systems employs Lotus Notes-based
online reporting using a system they call Business Bal-
anced Scorecard On-Line {BBS ON-Line).
Farr said the balanced scorecard's primary strength is
gaining the commitment and participation of manage-
ment and employees regarding company objectives.
"Employees have helped to create measures that are
meaningful to customers and to the business," he says. "In
this process, employees have analyzed what makes the
business successful and gained a greater understanding of
the business enterprise."
Other strengths include:
The BSC promotes the sharing of best practices and
creates a communication system worldwide. Each element
of the card has an owner whom employees can contact to
share success strategies and product fixes. BSC fosters
communication, collaboration, and problem solving.
The BSC supports a company's cultural change to a
learning organization by creating a common knowledge
base. If a metric is in the red zone, the employee can
quickly access how to fix potential problems and avoid
repeating others' mistakes, saving time and money in
problem solving.
The BSC represents an enhancement to the current
"Yellow Pages" in use at Philips. Out of a total workforce
of more than 250,000, roughly 22,000 employees have
chosen to share project knowledge and interests on a vol-
untary basis using the Philips Yellow Pages. Employees
working on similar projects can communi-
cate successes and pitfalls using the Yellow
Pages on the employee intranet. The BSC
takes the concept further with a defined
owner accountable for each element on
the card.
Other lessons Philips Electronics
learned include:
Software for use in capturing and
transferring data to a BSC in real time
should be selected carefully and
researched fully prior to implementing
the balanced scorecard. Many commer-
cial products are available, and Philips
Electronics uses a Lotus Notes-based
reporting system they call Business Bal-
anced Scorecard On-Line for Web-based reporting.
A balance must be reached to maintain visibility for
employee access while maintaining confidentiaUty of
company results that are sensitive and proprietary.
In trying to determine employee-level performance
indicators, the team learned that many critical success
factors can't be directly impacted by employees.
F A D O R F U T U R E ?
The use of a balanced scorecard as a strategic tool repre-
sents an opportunity for an executive team to align their
company to the strategic intent. Since the BSC represents
a fundamental change in how an organization is mea-
sured and held accountable for results, it also poses
threats to an established corporate culture and has poten-
tial weaknesses if it isn't executed properly. Yet the bal-
anced scorecard is a powerful strategic toolnot the
latest management fadfor strategic planning, goal set-
ting, goal alignment, and measurement. No other tool
provides the ability to balance all aspects crucial to busi-
ness performance in 2002 and beyond.
Andra Gumbus, Ed.D., is an assistant professor in the
management department at Sacred Heart University in
Fairfield, Conn., and can be reached at (203) 396-S271 or
[email protected]. She is the former director of
training and development at Philips Medical Systems North
America.
Bridget Lyons, DPS, is assistant professor in the
finance department at Sacred Heart University in
Fairfield, Conn., and can he reached at (203) 365-7673
or [email protected].
November 2002 I STRATEGIC FINANCE 49