Balanced scorecard

Balanced scorecard

This is a strategic performance management framework that has gained significant popularity since its introduction in the early 1990s by David Norton and Robert Kaplan. The BSC, or balanced scorecard, gives organisations a comprehensive and balanced approach to measuring and managing performance across various critical perspectives. Unlike traditional performance evaluation systems focusing solely on financial metrics, the BSC incorporates financial and non-financial indicators, recognising the significance of diverse aspects in achieving long-term success. 

What is a BSC? 

It is a performance measure for strategic management. It is known as BSC, and is used to identify ways to improve numerous internal company operations and assess the results of those improvements on the outside world. 

Moreover, BSC is used to evaluate and provide structure recommendations. Companies in the US, Europe, the British Isles, and Japan all use balanced scorecards as a normal operating procedure. 

Data collecting is essential for quantifiable outcomes since executives and managers must acquire and analyse the data. Business professionals’ decision-making regarding their companies’ foreseeable future may be improved with this knowledge. 

Understanding BSCs 

BSC is a performance management tool that helps organisations move beyond the traditional focus on financial metrics and take a more comprehensive and balanced approach to evaluating their performance. It is based on the recognition that financial results alone are insufficient to gauge a business’s overall health and success. Instead, the BSC incorporates a set of strategic objectives and key performance indicators, or KPIs, across multiple perspectives to provide a more holistic view of a firm’s performance. 

The four perspectives of the balanced scorecard: 

  • Financial perspective: 

The financial perspective is the most familiar aspect. It reflects the traditional economic measures of companies to assess their performance. This perspective includes revenue growth, profitability, return on investment, or ROI, and cash flow. While financial measures are crucial for evaluating the ultimate success of a business, they are considered lagging indicators as they show the results of past actions. 

  • Customer perspective: 

The customer perspective focuses on understanding and meeting the needs of an organisation’s customers. It includes measures related to customer satisfaction, customer retention, market share, and customer loyalty. By tracking these customer-centric KPIs, organisations can gauge their success in delivering value to their target market and ensure they meet customer expectations. 

  • Internal processes perspective: 

The internal processes perspective examines the efficiency and effectiveness of an organisation’s internal operations. It includes measures related to process cycle times, product or service quality, innovation, and operational excellence. Organisations use these measures to identify areas of improvement and streamline their internal processes to deliver better products or services to their customers. 

  • Learning and growth perspective: 

The learning and growth perspective focuses on the corporation’s learning, innovation, and employee development capacity. It includes metrics related to employee training, employee satisfaction, employee turnover, and the ability to foster a culture of continuous improvement and learning. This perspective acknowledges that a firm’s people and skills are fundamental to long-term success. 

Benefits of BSCs 

BSCs provide several benefits for companies.  

  • First, they ensure that all departments are strategically aligned by converting vision and objectives into useful metrics. This improves collaboration and concentration on mutual goals.  
  • BSCs offer a balanced picture of performance from the standpoint of finances, customers, internal operations, and learning and growth. It discourages overreliance on financial measurements and promotes a more thorough evaluation.  
  • Thirdly, BSCs support data-driven decision-making by offering insightful information and performance statistics, assisting managers in successfully allocating resources and prioritising activities.  
  • BSCs also encourage communication and transparency by explicitly outlining plans and progress to all staff members. This fosters ownership of goals and accountability.  
  • Additionally, BSCs encourage continuous development by continuously monitoring performance, allowing for timely strategy modifications and improvements.  
  • BSCs improve organisational performance overall, employee involvement, and flexibility to changes in the business environment. 

Working with BSCs 

Before creating a balanced scorecard, organisations must define their strategic objectives for the four perspectives of finances, customers, internal operations, and learning and growth. They then specify precise KPIs, or key performance indicators, that align with these goals. These metrics should be measurable, timely, and quantifiable over time. Once they are in place, they continually evaluate and revise these metrics to determine how well it accomplishes their strategic objectives. 

Examples   

Objectives  Goals  Indicators  Initiatives 
Increase Revenue  Increase net revenue by 10%  Value of invoices for each sale  Improve product mix and create combo deals 
  Increase average purchase value by 15%  Value of invoices for each sale  Implement telemarketing and online store 
  Transfer 30% sales to new channels  % of sales per channel  Develop partnership with online course business 
       
High average customer rating    Average customer rating  Develop new credit policies for distributors 
       
       
Offer the choice of sales channels       
       
Skilled sales force      Train 100% of sales team 

Frequently Asked Questions

The balanced scorecard model features four main characteristics: 

  • Comprehensive: It incorporates financial and non-financial indicators across multiple perspectives. 
  • Balanced: It ensures a balanced view of the company’s performance. 
  • Strategic: It aligns performance measures with strategic objectives. 
  • Continuous: It encourages regular monitoring and adaptation to changing circumstances. 

Balanced scorecards are important as they enable a clear understanding of how well their strategies are being executed. They help align employees with strategic goals, improve decision-making, and foster a culture of continuous improvement. 

To use a balanced scorecard, entities should: 

  • Define strategic objectives for each perspective. 
  • Identify relevant and measurable performance measures (KPIs). 
  • Assign responsibilities for data collection and analysis. 
  • Regularly review and update the scorecard to stay responsive to changing circumstances. 

The four perspectives of the balanced scorecard are 

  • Financial  

To focus on financial performance and results. 

  • Customer 

Emphasising customer satisfaction and loyalty. 

  • Internal processes 

Concentrates on improving internal operations. 

  • Learning and growth 

Focus on the company’s ability to innovate and grow. 

The four measures of the balanced scorecard pertain to the four perspectives: 

  • ROI and revenue growth rate. 
  • On-time delivery percentage concerning customer satisfaction index. 
  • Manufacturing cycle time and defect rate are internal processes. 
  • Employee training hours and turnover rates are indicators of learning and growth. 

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