Philips Electronics’ Balanced Scorecard

In the early 1990s, researchers Robert Kaplan and David Norton developed the “balanced scorecard (1).” Their concept was to expand the focus of managers to a more diverse set of financial and non-financial measures. A properly implemented and timely used balanced scorecard will “aid some organizations in better articulating and communicating their strategy, measuring the drivers of their performance, and detecting the superiority of one strategy over another (1).” Studies show that more than 50 percent of the Fortune 1000 companies use a version of Kaplan and Norton’s balanced scorecard (1).

Their scorecard aligns performance measures under four main categories: financial performance, customer relations, internal business practices, and learning and growth activities. The measures on the scorecard are designed to reflect cause and effect relationships between outcome (lag measures) and critical drivers (lead measures) (1).

A recent study shows that organizations that realize significant benefits from their scorecard systems have the following characteristics (2):

• Activity-based costing is in place with recognized value to the organization.
• A primary impetus for deploying the system is to communicate strategy and align employees with strategy.
• Formal ties exist between strategy and the scorecard system.
• The system is comprehensive, utilizing scorecards on many levels.
• Compensation and reward systems are linked to measures used in the scorecard system.

• Employees accept and use the scorecard system.

Philips Electronics has implemented a scorecard system to align company views, to focus employees on how they fit into the big picture, and to educate employees on what drives the business. Philips management uses the scorecard as a guide at quarterly business reviews worldwide to promote organizational learning and continuous improvement (3).

Philips created its balanced scorecard with the belief that understanding what drives present performance is the basis to determine future results. Philips uses the scorecard as a basis for employees to understand management’s strategic policies and vision for the future. Philips created four critical success factors (CSFs) to align indicators that measure markets, operations and laboratories with business success (3). At the business unit level, six key indicators are also included under each CSF. These CSFs and key indicators are:

Competence (knowledge, technology, leadership, and teamwork)
Indicators: Organizational development and IT support

Processes (drivers for performance)
Indicator: Operational excellence

Customers (value propositions)
Indicators: Customer delight and employee satisfaction

Financial (value, growth, and productivity)
Indicator: Profitable revenue growth

Philips uses these CSFs to link short-term actions with long-term strategy so that employees can link their actions to stated company goals (3). The Philips balanced scorecard has four card levels. The levels, in decreasing order, are the strategy review card, the operations review card, the business unit card, and the individual employee card (3). To achieve successful results, scorecard goals in lower card levels must align with scorecard goals in upper card levels and be fewer and less complex than the overall organizational goals.

In Philips Medical Systems North American (PMSNA), the balanced scorecard is being used to increase accountability for results. The scorecard is compiled using an automatic data transferring system that transfers data from internal reporting systems to the scorecard (3). This system allows employees to quickly see results each month, reduces the compilation time, and eliminates possible human error. Employees are able to understand exactly what they need to do on a daily basis to impact results. Chris Farr, former Philips Vice President of Quality and Regulatory at PMSNA, says that scorecard metrics must be shared and visible so employees can succeed (3).

Farr says a strength of the scorecard is that “employees have analyzed what makes the business succeed and gained a greater understanding of the business enterprise (3).” Philips has also seen that the scorecard promotes the sharing of best practices and creates a worldwide communication system where employees can share success practices, product fixes, project knowledge, interests, and pitfalls. This communication prevents employees from repeating fellow employees’ mistakes, saving time and money (3).

Philips has realized significant benefits due to implementing a worldwide scorecard system. Employees embrace and use the scorecard to improve results. Management uses the scorecard to communicate strategy and align employees with strategy. The scorecard is also used at all levels of the organization. Philips has implemented a balanced scorecard and succeeded in focusing the company on a diverse set of business measures.

References:

(1) Salterio, Steven and Webb, Alan. The Balanced Scorecard. CA Magazine, August 2003.

Lawson, Raef and Stratton, William. A new North American study explains how balanced scorecard users get their money’s worth. CMA Management, June/July 2003.

(3) Gumbus, Andra and Lyons, Bridget. The Balanced Scorecard at Philips Electronics. Strategic Finance, November 2002.