Balanced scorecard perspectives
|Balanced scorecard perspectives|
Main balanced scorecard perspectives
- Financial perspective - financial metrics that allow you to assess the financial effects of the deployed strategy. Specifies how the implemented strategy affects the economic health of the company.
- Customer perspective - aims to identify market segments in which the company intends to compete. Consists of Indicators that reflect the company's participation in customer service, their level of satisfaction.
- Internal processes perspective - indicators relating to the processes of creating value for the customer.
- Learning and development perspective - metrics that show the basics of long-term development and improvement.
Balanced scorecard as a strategic tool
A Balanced Scorecard has gained fame, since its invention in 1990s by Kaplan and Norton, due to its use as a strategic management tool. The introduction of a strategic map by Kaplan and Norton in 200, provides for a linkage of strategic objectives and scorecard perspectives, and at the same time, a potential for using the balanced scorecard for evaluating the success of a company's strategy.
The balanced scorecard is a tool that enables companies to clarify their vision and translate strategy goals into specific measures and to monitor company performance against these measures. Management traditionally pays attention to financial performance measures, with less attention to the drivers behind those measures. A balanced scorecard that addresses the four key perspectives allows management to monitor the drivers behind financial performance or the performance of key activities that contribute to positive financial results. Furthermore, financial performance measures are lagging indicators while a range of scorecard perspectives provides information related to performance of leading indicators, which are more crucial to strategic decision making.
Leading indicators of the balanced scorecard perspectives:
- Costumers perspectives – a company must translate strategic goals into specific measures to reflect what matters to its customers. Customer satisfaction is a leading indicator of success because unsatisfied customers will find alternatives.
- Internal business process perspective – metrics should be established to measure if internal processes are in place to design products and services that meet customer needs. Weaknesses in internal processes creates an obstacle in meeting the changing customer demands.
- Learning and growth perspective – a company's ability to introduce new and innovative products and meet the changing needs of its customers is based on its knowledge base. Ability to innovate requires appropriate knowledge, research and development.
The final, financial, perspective provides primarily lagging information for strategic decision making but it is crucial to measuring the success of business activities in generating shareholder value and a company's going concern.
- Financial perspective – measures that communicate the consequences of strategic actions in financial terms. These measures are important to shareholders.
Examples of Balanced scorecard perspectives
- Financial: This perspective looks at the overall financial performance of the organization. Examples include measures such as Return on Investment (ROI), Operating Profits, Revenue, and Cash Flow.
- Customer: This perspective focuses on the customer experience and satisfaction. Examples include measures such as Customer Satisfaction, Customer Retention, Customer Acquisition Rates, and Market Share.
- Internal Business Processes: This perspective looks at the internal processes and systems within the organization. Examples include measures such as Quality, Cost, Delivery, and Productivity.
- Learning and Growth: This perspective focuses on the development of employees, the organization’s culture, and the use of technology. Examples include measures such as Employee Engagement, Training and Development, Innovation, and Use of Technology.
Advantages of Balanced scorecard perspectives
Balanced scorecard perspectives provide a comprehensive view of a company’s performance by taking into account different perspectives. The following are some of the advantages of using balanced scorecard perspectives:
- Improved Strategic Alignment: Balanced scorecard perspectives help to bridge the gap between an organization’s strategy and day-to-day operations. By focusing on both short-term and long-term objectives, a company can ensure that their resources are being used in the most effective way.
- Improved Performance Measurement: Balanced scorecard perspectives provide a framework for measuring performance across multiple dimensions. This allows a company to track its progress against its own goals, as well as against industry standards.
- Improved Accountability: Balanced scorecard perspectives allow companies to hold individuals and teams accountable for their performance. By providing a consistent framework for evaluation, companies can ensure that everyone is held to the same standards.
- Improved Communication: Balanced scorecard perspectives provide a common language that can be used to communicate performance goals and objectives across the organization. This allows everyone to understand the same key metrics and objectives, which helps to ensure that everyone is working toward the same goal.
Limitations of Balanced scorecard perspectives
Balanced scorecard perspectives are a valuable tool for evaluating and monitoring the performance of a company. However, there are certain limitations to using this approach:
- The Balanced Scorecard can be a complex tool to use, and requires significant effort to create and maintain.
- It does not measure the degree of customer satisfaction or loyalty.
- It does not measure the impact of external factors, such as competition and market conditions, on the company’s performance.
- It may not be suitable for all types of businesses, as some organizations may have different priorities or goals.
- It may not be suitable for small businesses, as many of the measures may be too complicated or costly to implement.
- It may be difficult to measure intangible aspects of performance, such as employee morale, brand recognition, and customer satisfaction.
- It may take a long time to measure the impact of changes in the strategy and how they are reflected in actual performance.
The following are other approaches related to Balanced scorecard perspectives:
- Strategic mapping: This approach examines how the organization's strategic objectives map to the individual business units and the overall organization. It helps to identify gaps in the current strategy, and allows for strategic adjustments to be made in order to meet the desired outcomes.
- Process Improvement: This approach focuses on examining and improving operational processes in order to increase efficiency and reduce costs. It can also help to identify areas where investments can be made in order to improve the performance of the organization.
- Customer Relationship Management: This approach focuses on identifying customer needs and developing strategies to meet those needs. It is used to help build customer loyalty and increase customer satisfaction.
- Risk Management: This approach evaluates the potential risks associated with the organization and helps to develop strategies to minimize those risks.
In summary, Balanced scorecard perspectives can be supplemented with other approaches such as strategic mapping, process improvement, customer relationship management, and risk management in order to gain a more holistic view of the organization.
- Agrawal, S. (2008). Competency Based Balanced Scorecard Model: An Integrative Perspective, Indian Journal of Industrial Relations. Vol. 44, No. 1, p. 24-34. Balanced Scorecard, 25-26.
- Cheng, M. M., Humphreys, K. A. (2012). The Differential Improvement Effects of the Strategy Map and Scorecard Perspectives on Manager’s Strategic Judgement, The Accounting Review, Vol. 87, No. 3, p. 899-924. Introduction, 899-900.
- Sainaghi, R., Phillips, P., & Corti, V. (2013). Measuring hotel performance: Using a balanced scorecard perspectives’ approach. International Journal of Hospitality Management, 34, 150-159.
- Saingaghi, R., Phillips, P., Corti, V. (2013)
- Cheng, M. M., Humphreys, K. A. (2012)
- Agrawal, S. (2008)
- Agrawal, S. (2008)
Author: Urszula Szydłowska