Linking Strategy to Performance Measures

14.7 Linking Strategy to Performance Measures

In the realm of managerial accounting, aligning strategy with performance measures is crucial for organizations aiming to achieve their strategic objectives effectively. This alignment ensures that every aspect of the organization is working towards common goals, enhancing overall performance and strategic success. This section delves into the intricacies of linking strategy to performance measures, with a particular focus on the Balanced Scorecard approach, a widely adopted framework for strategic management.

Understanding the Balanced Scorecard

The Balanced Scorecard (BSC) is a strategic planning and management system that organizations use to:

• Communicate what they are trying to accomplish.
• Align the day-to-day work that everyone is doing with strategy.
• Prioritize projects, products, and services.
• Measure and monitor progress towards strategic targets.

Developed by Robert Kaplan and David Norton, the Balanced Scorecard transforms an organization’s strategic plan from an attractive but passive document into the “marching orders” for the organization on a daily basis. It provides a framework that not only provides performance measurements but helps planners identify what should be done and measured.

The Four Perspectives of the Balanced Scorecard

The Balanced Scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data, and analyze it relative to each of these perspectives:

1. Financial Perspective: This perspective covers the financial objectives of an organization and allows managers to track financial success and shareholder value. It includes measures such as revenue growth, cost management, and profitability.

2. Customer Perspective: This perspective focuses on the customer’s view of the organization. It includes measures such as customer satisfaction, retention, and market share.

3. Internal Business Processes Perspective: This perspective focuses on the internal processes that create value for customers and shareholders. It includes measures such as process efficiency, quality, and innovation.

4. Learning and Growth Perspective: This perspective focuses on the intangible assets of an organization, primarily human capital, information capital, and organizational capital. It includes measures such as employee satisfaction, retention, and skills development.

Linking Strategy to Performance Measures

To effectively link strategy to performance measures, organizations must ensure that their strategic objectives are clearly defined and that appropriate metrics are established to track progress towards these objectives. Here’s how organizations can achieve this alignment:

Step 1: Define Strategic Objectives

Strategic objectives are the specific goals that an organization aims to achieve. These objectives should be clear, measurable, and aligned with the organization’s mission and vision. For example, a strategic objective might be to increase market share by 10% over the next year.

Step 2: Develop Performance Measures

Performance measures are the metrics used to assess progress towards strategic objectives. These measures should be aligned with the strategic objectives and should provide actionable insights. For example, if the strategic objective is to increase market share, a performance measure might be the percentage increase in sales revenue.

Step 3: Align Performance Measures with the Balanced Scorecard Perspectives

Each performance measure should be aligned with one or more of the Balanced Scorecard perspectives. This ensures that the organization is taking a holistic approach to performance management and is considering all aspects of the business.

Step 4: Implement Performance Measures

Once performance measures have been developed and aligned with the Balanced Scorecard perspectives, they should be implemented across the organization. This involves communicating the measures to all relevant stakeholders and integrating them into the organization’s performance management system.

Step 5: Monitor and Review Performance

Regular monitoring and review of performance measures are essential to ensure that the organization is on track to achieve its strategic objectives. This involves collecting and analyzing data, identifying areas for improvement, and making necessary adjustments to strategies and performance measures.

Practical Examples and Case Studies

Example 1: A Retail Company

A retail company might have a strategic objective to improve customer satisfaction. To achieve this, they could implement performance measures such as customer satisfaction surveys, net promoter scores, and customer retention rates. These measures would be aligned with the Customer Perspective of the Balanced Scorecard.

Example 2: A Manufacturing Company

A manufacturing company might have a strategic objective to improve operational efficiency. To achieve this, they could implement performance measures such as production cycle time, defect rates, and inventory turnover. These measures would be aligned with the Internal Business Processes Perspective of the Balanced Scorecard.

Case Study: Canadian Telecommunications Company

A Canadian telecommunications company implemented the Balanced Scorecard to align its strategy with performance measures. The company identified strategic objectives such as increasing market share, improving customer satisfaction, and enhancing operational efficiency. They developed performance measures such as market share percentage, customer satisfaction scores, and operational cost per unit. By aligning these measures with the Balanced Scorecard perspectives, the company was able to achieve significant improvements in performance and strategic success.

Challenges and Best Practices

Challenges in Linking Strategy to Performance Measures

1. Complexity: The process of linking strategy to performance measures can be complex, particularly in large organizations with multiple business units and stakeholders.

2. Resistance to Change: Employees may resist changes to performance measures, particularly if they perceive them as threatening or unfair.

3. Data Collection and Analysis: Collecting and analyzing data for performance measures can be resource-intensive and may require significant investment in technology and training.

Best Practices for Success

1. Clear Communication: Clearly communicate the strategic objectives and performance measures to all stakeholders to ensure buy-in and alignment.

2. Employee Involvement: Involve employees in the development and implementation of performance measures to ensure that they are relevant and achievable.

3. Continuous Improvement: Regularly review and update performance measures to ensure that they remain aligned with the organization’s strategic objectives and the external environment.

4. Leverage Technology: Use technology to streamline data collection and analysis, and to provide real-time insights into performance.

Conclusion

Linking strategy to performance measures is a critical component of effective strategic management. By aligning strategic objectives with performance measures, organizations can ensure that they are working towards common goals and can achieve significant improvements in performance and strategic success. The Balanced Scorecard provides a comprehensive framework for achieving this alignment and is widely used by organizations around the world.

References and Further Reading

• Kaplan, R. S., & Norton, D. P. (1996). The Balanced Scorecard: Translating Strategy into Action. Harvard Business Review Press.
• CPA Canada. (2023). Accounting Standards for Private Enterprises (ASPE).
• International Financial Reporting Standards (IFRS) as adopted in Canada.

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