Balanced Scorecard

What Is a Balanced Scorecard (BSC)?

A balanced scorecard wass created by Dr.Robert Kaplan and Dr.David Norton in 1992, as a performance evaluation tool, using a more balanced set of performance measures. 

It is a strategic measurement and management tool that translates an organization’s strategy into four folds. The primary objective of creating this strategic measurement tool was to develop a system that could measure performance and address deficiencies.

The observation on organizations concluded that most organizations failed to understand the significance of objectives set by the organization, leading to the organization’s failure.

The Balanced Scorecard (BSC) is a strategic planning and measurement tool/system that is used to:

• Clarify and communicate strategy
• Ensure alignment of individuals and departments with the firm
• Ensure alignment with the budgeting strategy
• Prioritize works, projects, products/services
• Seeking continuous feedback for constant improvement in the strategy 

Understanding strategic management and strategic planning is important before we proceed because these two concepts are the core of the BSC.

Strategic management is the continuous process of creating a strategy, analyzing it, implementing it, and monitoring it. Organizations use it to maintain a competitive advantage.

It's also deemed art and science for formulating, implementing, and evaluating cross-functional decisions that aid in achieving organizational objectives.

It is a comprehensive collection of continuing operations and activities that organizations use to coordinate and align with mission & vision statements and strategy.

On the other hand, Strategic planning is a management activity used to set priorities. It also helps focus energies and resources and strengthen the organization's operations.

It ensures that employees and stakeholders are both working toward a common goal. It is an organized effort to produce fundamental decisions and actions that shape and guide the enterprise's efforts.

Producing actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future.

Understanding a Balanced Scorecard

A balanced scorecard (BSC) is defined as a management system that provides feedback on both internal business processes and external outcomes to continuously improve strategic performance and results. - asq.org

A management system is a way in which an organization manages the interrelated parts of its business to achieve its objectives. This management system acts as an anchor providing insights into how well the organization is doing.

Internal and external processes both have an impact on profitability and operational efficiencies. Feedback in these processes shall prove to be beneficial.

The feedback must be continuous and rapid for continual improvements in the strategy to achieve desired results.

The balanced scorecard (BSC) is a strategic planning and management system. - balancedscorecard.org

Norton and Kaplan define the BSC's aim as 

To align business activities to the business's vision and strategy, improve internal and external communications, and monitor business performance against strategic goals.

It's imperative to monitor the organization's performance and compare it to the goals set with strategic values. This constant analysis helps the managers envision future performances and the deviations that can affect them unfavorably.

For BSC to be successfully implemented, it requires communication and coordination at all levels.

Balanced Scorecard provides organizations with simple tools that help in translating the strategy. The 4 folds of BSC are:

• Financial Perspective
• Customer Perspective
• Internal Business Process Perspective (IBP)
• Learning & Growth Perspective (L&G)

The scorecard advocates financial measures that are historical, subjective, and quantitative. On the other hand, the other 3 perspectives (Customer, IBP, L&G) are leading indicators of success. Improvements in these perspectives lead to future growth.

They aren't historic or subjective. Rather, focusing on these measures could improve business overall, improving financial and non-financial aspects.

The primary objective of the BSC is to simultaneously focus on financial information and create the abilities and intangible assets required for long-term growth. This is executed by translating a company's strategy into specific measures within each strategy.

KPI And Balanced Scorecard

In performance evaluation, the BSC's method is trending in managing the implementation of a firm's strategy. It's a communication tool for strategy, connecting the critical success factors to measuring a firm's performance.

These critical success factors are termed Key Performance Indicators (KPIs). They are specific financial and non-financial elements of a firm’s success. Achieving KPIs is critical to a firm’s success and competitive advantage.

BSC is a goal congruence tool. The managers are informed about the financial & non-financial measures essential for success.

A SWOT analysis should be conducted to select the right measurement indicators, effectively deploy the KPIs, and implement BSC.

A firm identifies KPIs by means of SWOT Analysis.

The SWOT Analysis is a comprehensive study of the strengths, weaknesses, opportunities, and threats of a firm.

Each letter of 'SWOT' denotes all the elements stated above.

• Strengths are internal to the organization and core competencies.
• Weaknesses are internal as well-- areas organization is at some kind of disadvantage.
• Opportunities, elements, and changes in the external environment generate profits and revenues.
• Threats are elements and circumstances that prove to be disadvantageous to the organization.

The SWOT Analysis highlights the basic factors related to cost, quality, and the speed of product development and delivery. The organization can also use PEST Analysis to analyze external factors affecting the firm's external environment.

The PEST Analysis is an extensive study of Political, Environmental, Social, and Technological factors that are critical for success and shutting down threats coming from outside.

After the KPIs are decided, a measurement unit is assigned to each subject. This approach is based on the premise that "If you can't measure, you can't control it" (Kaplan/Norton). While developing KPIs, some conflicts arise. However, this is avoided as BSC integrates the KPIs into the firm's strategy.

Balanced Scorecard usage

Once the KPIs are defined, they must be linked back to the firm's strategy. Successful BSC creates a shared understanding within the organization and how individuals contribute to the firm's success.

Elements of the BSC come from the organization's strategy. The BSC shows what a strategy is. Linking the 4 perspectives to strategy requires an understanding of the following 3 principles:

1. Cause-Effect Relationship

All the KPIs should fit within the overall C-E relationship chains that end with the financial measures. Showing the achievement of a part of the firm's strategy.

These chains should also explain how to measure each element and how to provide feedback.

These C-E chains should progress through each of the 4 perspectives and should explicitly describe the firm's strategy. And finally, incorporate all KPIs into one of these chains.

2. Linking to Financial Measures

No matter how focused an organization is on qualitative factors, it is important to link to the financial perspective.

3. Outcome Measures & Performance Drivers

For force Chains of KPIs to be successful, they must be linked to specific outcomes and performance drivers that explain how the desired outcome could be met.

• Lagging Indicators/Outcome Measures: Measure the current and past performances. Only known after an event has already occurred. It confirms and clarifies the patterns and trends over time.
• Historic in nature: Examples include Profitability, Market Share, Employee Skills, etc.
• Leading Indicators/Performance Drivers: These are indicators that might predict future favorable outcomes. They are indicators and drivers specific to the Business Unit's strategy. Examples: Cycle Times, Setup Times, Patents, etc.

Four perspectives of the balanced scorecard

Four perspectives form the basis of the Balanced Scorecard, each providing a distinct lens through which to assess performance and direct the formulation of strategic decisions.

When combined, these four viewpoints offer a thorough framework for assessing organizational performance and directing strategic planning and decision-making.

Organizations may create balanced strategies that promote success and sustainable growth in the complicated business environment of today by taking into account the views of finance, customers, internal processes, and learning and growth.

Financial Perspective

This viewpoint is focused on the organization's performance and financial health. It focuses on measures that have an immediate effect on shareholder value and the bottom line.

1. Revenue Growth: It measures the rise in revenue over a given time frame to show how profitable the company is.
2. Profitability: The ability of an organization to turn a profit in relation to its outlays and investments is measured by its profitability.
3. Return on Investment (ROI): This metric compares the return on investment to the cost of the investment to assess how efficient an investment is.
4. Cash Flow: It evaluates the organization's capacity to create cash and efficiently handle cash inflows and outflows.
5. Cost reduction: It encompasses efforts to cut expenses without compromising performance or quality are measured in order to increase profitability.

Customer Perspective

This viewpoint is centered on comprehending and fulfilling the wants and expectations of the consumer to promote long-term success and loyalty.

1. Customer satisfaction scores: This indicates how happy customers are with the goods, services, and general experiences they have had.
2. Customer Retention Rates: It shows satisfaction and loyalty by tracking the proportion of customers kept over a given time frame.
3. Market Share: It indicates how much of a company's overall sales come from a particular industry or sector.
4. Customer Lifetime Value: This is a useful tool for determining customer acquisition and retention tactics, it estimates the total revenue a customer is likely to contribute over the course of their relationship with the business.

Internal Process Perspective

This viewpoint focuses on the internal operations and processes that are essential for effectively providing value to stakeholders and customers.

1. Cycle time: It calculates how long it takes to finish a task or provide a good or service from beginning to end.
2. Process Quality: It evaluates the outputs and processes for consistency and quality, striving for the least amount of flaws or mistakes.
3. Productivity: It is the ratio of the output to the efficiency of the resources used in the production of goods or services.
4. Innovation Metrics: It monitors innovation-related activities and results, such as patents, process enhancements, and the creation of new products.

Learning and Growth Perspective

This viewpoint highlights the significance of ongoing learning, staff development, and organizational capacities to promote innovation and future growth.

1. Employee Satisfaction Scores: Employee Engagement, Morale, and Satisfaction with Work Environment and Growth Opportunities are all measured by employee satisfaction scores.
2. Employee Turnover Rates: It monitors the proportion of workers quitting the company over a given time frame, providing insight into issues with retention or job satisfaction.
3. Training and Development Investments: The Training and Development Committee measures investments in staff training and development programs to advance skills and knowledge.
4. Innovation Pipeline Metrics: It monitors the volume and calibre of concepts and inventions in the pipeline, demonstrating the potential for future expansion and competitiveness of the company.

Elements Of The Balanced Scorecard

The Balanced Scorecard (BSC) framework has several essential components. It aids organizations in coordinating performance management and measurement with their strategic goals.

The following are the Balanced Scorecard's fundamental components:

1. Strategic Goals

The organization's main goals and aspirations are known as its strategic objectives. They articulate the desired outcomes that the organization aims to achieve to fulfill its mission and vision.

These objectives are typically derived from the organization's strategic plan and represent the key areas of focus to drive success and competitiveness.

2. KPIs, or key performance indicators

KPIs are precise, quantifiable measurements that are used to assess how well strategic goals are being accomplished and how far they have come.

Every strategic goal has a key performance indicator (KPI) attached to it, which offers quantitative information to monitor progress and guide choices.

KPIs are designed to represent the organization's priorities and can be either non-financial (e.g., employee engagement, customer happiness) or financial (e.g., revenue growth, profit margins).

3. Objectives or Standards

Organizations strive to meet predetermined performance standards known as targets or benchmarks for every KPI. These objectives function as benchmarks or objectives to direct efforts towards performance enhancement and offer a framework for success assessment.

4. Plans of Action or Initiatives

Initiatives or action plans are the precise tasks, programs, or interventions intended to promote performance improvement and accomplish strategic goals.

These programs are implemented to close performance gaps and seize opportunities, and they are in line with the strategic priorities listed in the Balanced Scorecard.

Action plans provide explicit accountability and progress monitoring by outlining the resources, deadlines, roles, and milestones related to each endeavor.

5. Strategy maps

Strategic maps, also known as strategy maps, offer a visual portrayal of the cause-and-effect links between strategic objectives and success drivers.

They serve as examples of how completing certain tasks advances the accomplishment of more important strategic objectives, which in turn advances the company's mission and vision.

Balanced Scorecard Functionality

The Balanced Scorecard (BSC) is a strategic management framework that translates an organization's mission and vision into concrete goals and performance indicators across four main perspectives: financial, customer, internal processes, and learning and growth.

The BSC operates as follows:

1. Comprehending the Goals: The BSC must understand the organization's strategic objectives. These goals need to be clearly stated and in line with the organization's overarching plan. 

2. Linking Measures to Objectives: Every strategic goal that has been determined needs to be linked to one or more KPIs or performance metrics. These metrics give the company measurable information that it can use to evaluate its performance in relation to pre-established goals.

3. Creating Cause-and-Effect Connections: Management must establish cause-and-effect links between strategic objectives and how they affect KPIs in order to guarantee the BSC's efficacy. This alignment facilitates focusing resources on tasks that produce the intended results.

4. Consistency with Higher-Level Goals: Achieving goals at lower organizational levels facilitates reaching more general goals from higher vantage points.

5. Implementing a Strategy Map: Integrating goals and viewpoints represents the Strategy Map's execution. A strategy map graphically shows the cause-and-effect links between strategic objectives, showing how accomplishing one goal leads to the accomplishment of higher-level strategic goals.

6. Measurement Standards: Organizations must develop pertinent criteria in order to measure goals towards success. While leading indicators evaluate performance drivers and offer insights into both previous performance and prospective success elements, lagging indicators monitor results.

7. Benefit-Cost Analysis: It is crucial to carry out a thorough Cost-Benefit analysis prior to launching any activities to meet the targets outlined in the BSC. This analysis ensures that initiatives are in line with organizational aims and objectives and that resources are distributed efficiently.

Benefits of a balanced scorecard

Employing a Balanced Scorecard (BSC) has several advantages for businesses:

1. Clarity and Focus: To ensure that activities are coordinated at all levels, the BSC offers a precise structure for converting the organization's vision and strategy into concrete goals and doable actions.

2. Alignment of Objectives: The BSC makes sure that all departments and personnel are working towards the same goals by aligning strategic objectives across several perspectives (financial, customer, internal processes, learning, and growth).

3. Better Communication: The BSC's visual character, which includes strategy maps, fosters organization-wide knowledge and buy-in of strategic priorities.

4. Performance Measurement: The BSC facilitates performance measurement. It gives organizations the tools to track and measure performance to identify areas for improvement and areas of strength.

5. Strategic Execution: By concentrating efforts on activities that make the most contributions to strategic objectives, the BSC assists in setting priorities for initiatives and resources, resulting in more successful strategic execution.

6. Early Warning System: By keeping an eye on leading indications, the BSC helps businesses spot possible problems and hazards before they get out of hand, facilitating proactive management and decision-making.

7. Accountability: The BSC framework's defined objectives, measurements, and targets aid in establishing accountability at all organizational levels by making sure that each person is accountable for their contribution to the organization's strategic goals.

Example of a balanced scorecard

Strategic map for an E-Commerce Business

The Balanced Scorecard (BSC) is a framework for strategic management that enables organizations to effectively negotiate the complexity of today's business environment.

It is not just a tool for measuring performance. By utilizing the BSC, leaders may make well-informed decisions that are in line with strategic objectives. The BSC offers a comprehensive view of organizational performance through the integration of financial and non-financial aspects.

Organizations can attain cross-functional and cross-level alignment with the BSC, guaranteeing that each department and individual makes a significant contribution towards the overall objectives.

This alignment encourages cooperation and a common understanding of priorities, which propels group efforts toward achievement.

The BSC's capacity to convert strategic intent into practical action is one of its greatest advantages. Strategic execution is facilitated by the BSC, which breaks down high-level objectives into concrete, quantifiable targets and lead indicators.

This guarantees that plans are not only developed but also successfully carried out, producing observable effects and consequences.

Moreover, the BSC acts as an impetus for ongoing development and learning inside the company. Leaders can pinpoint areas of strength and areas for improvement by routinely reviewing and analyzing performance indicators.

As a result, there is a culture of creativity and adaptation where tactics and processes are continuously improved and optimized based on insights from performance analysis.

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