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Authors: Robert S. Kaplan, David P. Norton
Tags: Non-Fiction, Business
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financial objectives for all business units should be reviewed periodically, probably at least annually, to reaffirm or change the unit’s financial strategy.
Risk Management
Effective financial management must address risk as well as return. Objectives relating to growth, profitability, and cash flow emphasize improving returns from investment. But businesses should balance expected returns with the management and control of risk. Thus, many businesses include an objective in their financial perspective that addresses the risk dimension of their strategy—for example, diversifying revenue sources away from a narrow set of customers, one or two lines of business, or particular geographical regions. In general, risk management is an overlay, an additional objective that should complement whatever expected return strategy the business unit has chosen.
Strategic Themes for the Financial Perspective
We have found that, for each of the three strategies of growth, sustain, and harvest, there are three financial themes that drive the business strategy:
Revenue growth and mix
Cost reduction/productivity improvement
Asset utilization/investment strategy
Revenue growth and mix refer to expanding product and service offerings, reaching new customers and markets, changing the product and service mix toward higher-value-added offerings, and repricing products and services. The cost reduction and productivity objective refers to efforts to lower the direct costs of products and services, reduce indirect costs, and share common resources with other business units. For the asset utilization theme, managers attempt to reduce the working capital levels required to support a given volume and mix of business. They also strive to obtain greater utilization of their fixed asset base, by directing new business to resources currently not used to capacity, using scarce resources more efficiently, and disposing of assets that provide inadequate returns on their market value. All these actions enable the business unit to increase the returns earned on its financial and physical assets.
To view the selection of the drivers of aggregate financial objectives as cells in a 3 × 3 matrix across the three business strategies and the three financial themes, see Figure 3-1.
R EVENUE G ROWTH AND M IX
The most common revenue growth measure, both for growth-and harvest-stage business units, would be sales growth rates and market share for targeted regions, markets, and customers.
New Products
Growth-stage businesses will usually emphasize expansions of existing product lines or offering entirely new products and services. A common measure for this objective is the percentage of revenue from new products and services introduced within a specified period, say two to three years. This measure has been extensively used by innovative companies, like Hewlett-Packard (HP) and the 3M Corporation. Of course, like any good measure, this objective can be achieved in both good and less good ways. The preferred way is for the new product or new product extension to be a dramatic improvement on existing offerings so that it captures new customers and markets, not just replaces sales of existing products. But if too much pressure is placed on this measure alone (less of a danger with a Balanced Scorecard), a business unit could score well on this measure by making a continuing series of incremental improvements that replace existing products but none of which offers distinct advantages to customers. Or, alternatively, and more dysfunctionally (and, fortunately, much less likely), a business unit could simply cease selling a high-volume mature product, allowing recent product sales to represent a higher fraction of total sales. To capture whether the new product or service represents a distinct improvement from existing offerings, some companies focus on the prices or gross margins from new products and services, anticipating that offerings with significantly more
Risk Management
Effective financial management must address risk as well as return. Objectives relating to growth, profitability, and cash flow emphasize improving returns from investment. But businesses should balance expected returns with the management and control of risk. Thus, many businesses include an objective in their financial perspective that addresses the risk dimension of their strategy—for example, diversifying revenue sources away from a narrow set of customers, one or two lines of business, or particular geographical regions. In general, risk management is an overlay, an additional objective that should complement whatever expected return strategy the business unit has chosen.
Strategic Themes for the Financial Perspective
We have found that, for each of the three strategies of growth, sustain, and harvest, there are three financial themes that drive the business strategy:
Revenue growth and mix
Cost reduction/productivity improvement
Asset utilization/investment strategy
Revenue growth and mix refer to expanding product and service offerings, reaching new customers and markets, changing the product and service mix toward higher-value-added offerings, and repricing products and services. The cost reduction and productivity objective refers to efforts to lower the direct costs of products and services, reduce indirect costs, and share common resources with other business units. For the asset utilization theme, managers attempt to reduce the working capital levels required to support a given volume and mix of business. They also strive to obtain greater utilization of their fixed asset base, by directing new business to resources currently not used to capacity, using scarce resources more efficiently, and disposing of assets that provide inadequate returns on their market value. All these actions enable the business unit to increase the returns earned on its financial and physical assets.
To view the selection of the drivers of aggregate financial objectives as cells in a 3 × 3 matrix across the three business strategies and the three financial themes, see Figure 3-1.
R EVENUE G ROWTH AND M IX
The most common revenue growth measure, both for growth-and harvest-stage business units, would be sales growth rates and market share for targeted regions, markets, and customers.
New Products
Growth-stage businesses will usually emphasize expansions of existing product lines or offering entirely new products and services. A common measure for this objective is the percentage of revenue from new products and services introduced within a specified period, say two to three years. This measure has been extensively used by innovative companies, like Hewlett-Packard (HP) and the 3M Corporation. Of course, like any good measure, this objective can be achieved in both good and less good ways. The preferred way is for the new product or new product extension to be a dramatic improvement on existing offerings so that it captures new customers and markets, not just replaces sales of existing products. But if too much pressure is placed on this measure alone (less of a danger with a Balanced Scorecard), a business unit could score well on this measure by making a continuing series of incremental improvements that replace existing products but none of which offers distinct advantages to customers. Or, alternatively, and more dysfunctionally (and, fortunately, much less likely), a business unit could simply cease selling a high-volume mature product, allowing recent product sales to represent a higher fraction of total sales. To capture whether the new product or service represents a distinct improvement from existing offerings, some companies focus on the prices or gross margins from new products and services, anticipating that offerings with significantly more
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