Balanced scorecard is a concept developed by Kaplan and Norton for effective monitoring of operational and strategic activities of a company. It uses a coherent system of financial and non-financial indicators (so called strategy map) to make assessment of the current state of the organization. Balanced scorecard assumes representation of strategic goals in the form of a set of measurable objectives necessary for the execution of the mission of the company. It is used to ensure consistency between the objectives and the activities undertaken, measure and control the effects of strategic activities and motivating workers.
Perspectives and metrics of balanced scorecard approach
The task of the scorecard is to coordinate major strategic areas of the company. Balanced scorecard perspectives are a set of metrics in four different perspectives: financial, customer, internal processes and development and their mutual interactions (of course, managers can add other relevant metrics and perspectives, four are only example given by Kaplan and Norton).
Table 1. BSC Perspectives
|Financial perspective||Presented using 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||Its aims are 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||Presented by means of indicators relating to the processes of creating value for the customer.|
|Learning and development perspective||Presented by using metrics that show the basics of long-term development and improvement.|
Application of balanced scorecard
A scorecard shows the errors in the past and shows what went wrong. The company can learn from those mistakes and make better decisions in the future. This gives a clear and transparent picture of how companies and their functional units work to achieve strategic objectives.
Consists of balancing indicators financial and operational indicators that is why scorecard is called "balanced". To create this card managers uses the metrics of results and metrics of future (goals). The information generated by them are extremely important for executives at various levels. Allows to accurately monitor the existing activities and operations in the future.
Advantages of balanced scorecards
- consists of simple and logically selected indicators,
- it is a useful tool in monitoring the achievement of the strategic objectives of the company,
- clearly identifies company resources, its business units in the entirety of the objectives and ways of achieving them,
- can be used throughout the company through departmental scorecards as well as the achievements scorecards for individual employees,
- allows for synchronization of activities of all units and individual employees in order to achieve the strategic objectives of the company,
- positively affects the employees and motivates them to efficient operation.
Examples of Balanced scorecard
- Financial Perspective: This perspective is focused on profitability and ensuring that the organization is financially sound. Examples of indicators include Return on Investment (ROI), Return on Assets (ROA), and Earnings per Share (EPS).
- Customer Perspective: This perspective focuses on the organization's ability to meet customer needs and maintain customer satisfaction. Examples of indicators include customer satisfaction scores, customer retention rates, and customer loyalty metrics.
- Internal Process Perspective: This perspective focuses on the organization's ability to effectively and efficiently manage its internal processes. Examples of indicators include process cycle times, process quality metrics, and process compliance measures.
- Learning and Growth Perspective: This perspective focuses on the organization's ability to develop and maintain its human capital. Examples of indicators include employee engagement scores, employee retention rates, and employee learning and development metrics.
Limitations of Balanced scorecard
- The balanced scorecard is a complex and time consuming tool to set up and maintain, and as such can be difficult to implement in an organization.
- It is also prone to misinterpretation if not used correctly, as the data collected may be seen as a true reflection of the company’s performance when it is not.
- It can also be difficult to select the right indicators, and to select those which accurately reflect the performance of the business.
- It also requires a certain level of expertise and understanding of the company’s operations in order to accurately interpret the results of the scorecard.
- The scorecard can be costly to implement and maintain, and the costs can outweigh the benefits if the scorecard is not used correctly.
- The data collected may be limited in accuracy and scope, as it is only based on the performance of the company’s activities and does not take into account external factors.
- The Balanced Scorecard is not the only approach that can be used to assess a company's performance and goals. Here are some other approaches:
- Strategic Management: Strategic management is an approach to directing and controlling an organization to achieve its objectives. It involves setting objectives, analyzing the environment, formulating and implementing strategies, and monitoring progress.
- Economic Value Added (EVA): EVA is a financial performance measurement that calculates the true economic profit of a company. It compares the returns generated by a company's operations to the costs of the capital employed to generate them.
- Performance Management: Performance management is a strategic approach to managing people and teams to achieve their best performance. It involves setting objectives, providing feedback, assessing performance and rewarding results.
- Total Quality Management (TQM): TQM is an approach to managing quality that emphasizes customer satisfaction, continual improvement, and team involvement. It involves setting quality standards, measuring performance against those standards, and taking corrective action when needed.
- Strategic Planning: Strategic planning is an approach to managing the future direction of an organization. It involves setting goals, analyzing opportunities, making decisions and taking action.
In summary, there are several approaches that can be used to assess a company's performance and goals, in addition to the Balanced Scorecard. Strategic management, economic value added, performance management, total quality management, and strategic planning are all approaches that can be used to evaluate a company's performance and goals.
- Kaplan, R. S., & Norton, D. P. (1995). Putting the balanced scorecard to work. Performance measurement, management, and appraisal sourcebook, 66, 17511.
- Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic management system.
- Kaplan, R. S., & Norton, D. P. (1996). Linking the balanced scorecard to strategy. California management review, 39(1), 53-79.