Philips Electronics’ Balanced Scorecard

In 1992, Robert Kaplan and David Norton introduced the balanced scorecard. These researchers aimed at creating a concept that would capture both financial and non-financial performance measures in organizations. Firms that have implemented and used balanced scorecard have been able to understand and communicate their strategy, measure the elements of their performance, and detect their strengths over other companies. Some studies have shown that more than “50 percent of the Fortune 1000 companies use a version of Kaplan and Norton’s balanced scorecard” (Gumbus and Lyons, 2002). The balance scorecard looks at performance indicators under four domains, which include “financial performance, customer relations, internal business practices, and learning and growth activities” (Gumbus and Lyons, 2002). These four areas show cause-and-effect relationships between lag measures (outcomes) and lead measures (critical drivers).

Some studies have identified consistent characteristics from firms that have noted significant benefits from their balanced scorecard (Lawson, Stratton and Hatch, 2003).

  • Organizations put activity-based costs in areas that have values to them
  • The main reason for using the balanced scorecard is to communicate strategies and align employees with strategies
  • There are formal links between strategies and the balanced scorecard system
  • The organizations depends on the balanced scorecard on several aspects
  • Payments and rewards depend on the measures applied in the balanced scorecard
  • Employees have embraced the balanced scorecard system

Philips Electronics has relied on the balanced scorecard in order to align its views, enhance employees’ focus, and promote employees’ education through factors that drive its business. The company has relied on the balanced scorecard as a means of providing guidance to employees during quarterly worldwide reviews for purposes of learning and improving the global operation.

The company bases its balanced scorecard system on the basis that understanding “current factors that drive performances are necessary in determining the future performance of the business” (Gumbus and Lyons, 2002). Employees of Philips understood the company’s strategic aims through the balanced scorecard. The company developed four critical factors for success (CSFs). CSFs identify and align market forces, operation, and laboratory factors with business strategies for success. The company also has other six indicators at the business level, which include (Gumbus and Lyons, 2002, p. 45):

  • Competence in knowledge, leadership, teamwork, and technology with indicators like IT support and organizational development
  • Processes that represent main drivers for performance, which have indicators of operational excellence
  • Customers have value propositions with indicators of delight and satisfaction in employees
  • Financial growth, value, and productivity with indicators of growths in revenues and profits (Gumbus and Lyons, 2002, p. 45)

The company relies on CSFs for relating both short-term and long-term strategies in order to guide employees with specific organizational goals. Philips implemented a balanced scorecard that focused on four areas, which included “the strategy review card, the operations review card, the business unit card, and the individual employee card” (Gumbus and Lyons, 2002). These cards of Philips had both low and upper levels. Therefore, effective results depended on the organizational strategy of aligning the low and upper level cards.

Philips also relied on the system for accountability. The balanced scorecard has “an automatic data transfer system within its internal system to the scorecard” (Gumbus and Lyons, 2002). The system provides opportunities for reducing “human errors, compilation time, and quick view of results” (Gumbus and Lyons, 2002). Therefore, workers have opportunities to understand effective strategies for improving performances. This implies that employees must gain full access to the balanced scorecard system. The balanced scorecard provides Philips with unique strengths because “employees analyze what makes the business succeed and gain a great understanding of the business enterprise” (Gumbus and Lyons, 2002).

Philips has noted that the balanced scorecard encourage best practices such as sharing of information in which employees share “product knowledge, success stories, pitfalls, similar interests, and product fixes” (Gumbus and Lyons, 2002). The aim of sharing information is to enable learning through sharing of information. As a result, Philips saves both time and money by reducing mistakes. The company has noted fundamental improvements since the implementation of the balanced scorecard system globally. The system has been effective because employees embraced and applied it in performance management. Philips management team has used the balanced scorecard as a way of “communicating and aligning its strategies with employees’ goals” (Gumbus and Lyons, 2002). In addition, it also relies on the balanced scorecard at all levels of the firm. The balanced scorecard has enabled Philips to focus on different measures and indicators of business performances.

The article shows that Philips Electronic uses the balanced scorecard for strategic and performance management reasons. It also identifies some of the reasons that facilitated the implementation of the balanced scorecard has the need to link strategies with the financial performance of the organization. In addition, the article also presents some of the improvements like learning and sharing knowledge, which Philips has realized due to implementation of the balanced scorecard globally.

Based on positive outcomes of the balanced scorecard, we can note that the balanced scorecard is a strategic and performance management tool for strategic alignment. Therefore, the balanced scorecard provides high-levels of accountability with regard to performance management. In this context, it is effective for “strategic planning, goal setting, goal alignment, and measurement” (Gumbus and Lyons, 2002).

References

Gumbus, A., and Lyons, B. (2002). The Balanced Scorecard at Philips Electronics. Strategic Finance, 84(5), 45.

Lawson, R., Stratton, W., and Hatch, T. (2003). The benefits of a Scorecard System: A new North American study explains how balanced scorecard users get their money’s worth. Web.