What is a Balanced Scorecard?
The strategic management and planning system used by an organization is known as balanced scorecard. The balanced scorecard is often used for purpose such as:
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To communicate well about what the organization wants to accomplish
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To align the daily work of employees with organizational strategy
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To prioritize on product, project and services level
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To monitor and measure the progress of organization towards the strategic goals
In order to identify the downfall in the internal function and to improve the performance balance scorecard is used as a performance metrics. It is very useful to provide feedback to the employees about their performance and outcomes. The crucial step of balance scorecard is data collection, the realistic information gathered is further interpreted by executives and managers in the company to provide a guideline for decision making in the future.
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Balanced Scorecard Meaning
Balanced scorecard basically connects dot between the strategic part of the organization and the operational elements. It make sure that mission, vision and core values of the organization are well reflected in the objective, initiatives and measures taken by the employees. It also checks the strategic performance is on the line to strategic focus areas.
Balanced Scorecard Definition
Balanced Scorecard is a performance based metric which companies used for strategic management. It improves the internal functions and external results of the business. As per Wikipedia The term 'balanced scorecard' primarily refers to a performance management report used by a management team, and typically focused on managing the implementation of a strategy or operational activities.
Kaplan and Norton Balanced Scorecard
In early 1990, Kaplan and Norton developed balance scorecard model to help firms in measuring their performance using data (both financial and non-financial). The aim of balance scorecard is ‘to align the work activities of organization to its vision and strategy, to improve communication and to monitor business performance with respect to strategic goals to be achieved’. According to the definition of balanced scorecard, it consists of relevant aspects of financial and non-financial information which supports the efficient business management.
Background to the Balanced Scorecard:
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Balanced scorecard states and define that a broad picture of status of organization can be predicted using several relevant measures.
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Instead of single measure organization should used composite scorecard which consists of different relevant measures linked with the goals and performance of the organization.
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Four perspectives are important and should be considered during analysis- customer, finance, internal, learning and growth.
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Critical measures should be selected by organization of each of these perspectives.
What are the 4 perspectives of Balance Scorecard?
There are four perspectives of Kaplan and Norton balanced scorecard to cover almost all the business aspects of the organization. It consist of the financial front, the customer point of view, the process which is internally follow, the learning as well as growth the organization is expecting and ongoing.
The four perspectives of balance scorecard are explained in detail as given below:
- The Financial Perspective
The obvious objectives of any organization include profit and revenue. The financial perspective of the balanced scorecard deals with the financial performance and health of organization. The financial objective popularly includes- cost saving and improved work efficiency, more profit margins and addition in revenue sources.
- The Customer Perspective
The customer focused organization always work on needs and wants of customer. If an organization wants to achieve the set financial goal then it has to know what need to be delivered to the customer. From customer perspective the company can set objects such as- improvement in customer service and satisfaction, increase market share and hike in brand awareness.
- The Internal Process Perspective
Now as the financial objective is set and company is aware about the wants of customer, then comes the processes which need to put properly to reach the set financial and customer related goal. Here the organization has to set the internal operational objectives. The company has to decide the actions which must be executed in order to dive the performance. The internal process of Kaplan and Norton Balanced Scorecard objective might cover- work process improvement, quality optimization and improvement in capacity utilization.
- The Learning and Growth Perspective
This perspective of balanced scorecard is related to intangible drivers of organizational performance. The spectrum of this perspective is very broad and thus segregated into parts such as human capital, information capital and organizational capital. The objectives of learning and growth perspective are- assessment of skills, talent and knowledge, information about safety system, infrastructure investment and data protection system, updates linked to staff engagement, employee alignment, knowledge management and teamwork.
Balanced Scorecard Model and its Approach
The balance scorecard model has four parts, which are the perspectives such as, financial perspective, customer perspective, learning and growth perspective and internal business processes perspective.
Each perspective further has their set objectives, the measures used to monitor the objective, the set target based on small time period and the initiatives taken by the organization.
The balanced scorecard approach is quite critical and organization should follow the eight steps given below:
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Preparation: The preparation is the first step organization should take before using balance scorecard model. Here, the organization should identify the business unit for which the balance scorecard is appropriate. It has to define the business unit which has its own financial measures, customers, production and distribution facilities.
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First round of interviews: In the 1st round of interview, the facilitator takes interviews of managers for around 90 minutes each. The purpose of these interviews is to obtain information about performance measures and strategic goal of the business unit.
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First executive workshop: A top management team and balance scorecard facilitator conduct workshop together to link measures with mission and strategy of organization. Video interviews of customers and shareholder can be conducted to take necessary inputs.
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Second round of interviews: A tentative balance scorecard is formed based on the executive workshop and interviews of each senior executive working in the business unit.
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Second executive workshop: This is a brainstorming session conducted with middle management, senior management and their subordinates. The debate results into development of a implementation plan to reflect strategy in the operational stage.
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Third executive workshop: Stretch targets are developed for each measures. After the development of all the measures the team discusses to agree and finalize them. Once this is done, an implementation plan is ready for execution.
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Implementation: A team implements the plan and links the performance measures with the database to communicate the balanced scorecard in the organization. It encourage that at decentralized units a second-level metrics is developed.
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Periodic reviews: Managers view and monitor the balanced scorecard quarterly or monthly. It is also re-visited annually to discuss on the future strategic planning process.
Balanced Scorecard Advantage and Disadvantages
Balanced scorecard is a popular approach which has its own set of advantages and disadvantages. It helps organization in certain aspects but it gets criticized by experts for the difficult changes organization has to put up to implement balance score card.
Advantages of Kaplan and Norton Balanced Scorecard
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It builds up the necessary focus required for the company to create a extraordinary performance.
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It integrates variety of business programs.
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It makes the organizational strategy operational by reflecting it in performance targets and measure.
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It connects the corporate level with the local managers to see what actions have to be taken to improve organizational efficiency.
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It improves the communication within the organization and provide a feeling of togetherness among employees.
Disadvantages of Kaplan and Norton Balanced Scorecard
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It increases number of performance indicators which can be confusing for the employees.
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It is very difficult to manage all the four perspective and create a required balance.
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Although the employees put hard work to make internal process effective, the senior management will still look for results in terms of instant financial performance.
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The balance scorecard system has to be updated regularly to make it relevant to the given point of action.
Purpose and Objectives of Balanced Scorecard
It is common concern about why organization should use balance scorecard? There are some purpose and objectives due to which balance scorecard is generally used in the organization.
Purpose : The main purpose of balance scorecard is to integrate the organization on one platform. It also empowers the employees who can now contribute in the organizational system through their thoughts and actions. The balance scorecard has a purpose of measuring both tangible and non-tangible aspects of performance. The balance scorecard serves a purpose of overall improvement of organization by taking care of four important perspective of organization.
Objectives : Every organization has a vision and mission, however, it often feel lost in day to day operational work. The main objective of balance scorecard is to ensure that at operational level the vision, mission and value of the organization is properly reflected. The objective of using balance scorecard to make sure that the set financial goal is achieved through a planned workout. The balance scorecard also helps to uplift the organization at the skill and talent level. The objective of balance scorecard is to understand the wants and needs of customer and to set a internal processes to satisfy the customers.
Balanced Scorecard industry practice example in performance measurement
The e-commerce business is reaching new high now in the market. The e-commerce organization can use the balance scorecard to improve the performance and make customer satisfied. Here is an example of balance scorecard developed for e-commerce organization.
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Objectives
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Goals
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Indicators
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Initiatives
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Financial perspective
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To increase sales of product and reduce the costs
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10% improvement in net sales, 5% reduction of operational cost
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Financial statements
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Negotiate with the raw material suppliers
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Customer perspective
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Increase range of products
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15% increase in launching new products per quarter
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Product launch report
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Create a innovation and creative team
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Internal process perspective
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Desirable increase in development of new products
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Start new product projects every month
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Project innovation reports
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Buy software to manage the product development
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Learning and growth perspective
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Improve the talent and knowledge of the staff
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Have at least two skillful professionals for product management
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Skill assessment of qualified and talented professionals
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Training sessions arranged for the talent improvement of the team.
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In this case a systematic process is followed to create a balance scorecard for e-commerce business organization.
In terms of Objectives
The organization wants to improve the sales and reduce the cost. Now, a question is asked how to improve sales? The sale will increase when customer will buy more products. So, from customer perspective what customer needs? The answer is ‘new range of products’. Here in order to make new products on operational level organization has to increase the number of new projects. Also, to have new innovative ideas about products the organization also needs talented and knowledgeable staff. In this way all the objects in the balance scorecard and linked with each other.
Goals
Once the objectives are set the organization has quantify the goals in terms of 10% improvement in net sales, 5% reduction of operational cost and 15% increase in launching new products per quarter. To achieve these goals the organization has to start a new project every month and should have at least two skillful professional in each new project team to improve work efficiency.
Indicators
The organization should come to know if the goals are reached or employees are working on right track, for this effective indicator are defined. Based on the financial statements, product launch report, product innovation report and skill assessment of the employees’, organization can make sure that the set goals are achieved.
Initiatives
In order to support the objective and goals the organization has take necessary actions. The actions includes negotiation with the raw material suppliers, creation of a innovation and creative team, purchase of software to manage the product development and arrangement of raining sessions for the talent improvement of the team.
In this way the balance scorecard helps the e-commerce company to link the organizational strategy with the operational activities.
An industrial case study
Here is a real life example of Tolko Industries Ltd which used balanced scorecard to get back into business and to sort out internal issues. The case is classic example of how balance scorecard can help the company to grow and sustain in changing market.
Challenges : During economic downturn it was difficult for Tolko Industries Ltd to sustain in the U.S housing market. The ongoing business strategies of the company was totally depending on sales and thus descend in revenue led to downfall of the company in 2007. Company had to take harsh decision of layoff of 3,500 employees and it was difficult to retain good employees in the organization. The company was based in Vernon, British Columbia, dealing in forest products.
The Decision : The situation of the company was miserable, thus to measure strategic performance, company got in touch with a Institute which further introduce them to balanced scorecard. The company soon realized that they need a big-picture strategy which can only be done using balanced scorecard. Henceforth, instead of executing a new strategic plan Tolko Industries decided to go for balanced scorecard with the help of The Institute Way.
Pre-communication : Tolko Industries Ltd had 22 business units which is a huge number to execute balanced scorecard in each unit. Company soon recognized that they should carry out strategic planning at corporate level. The leadership team soon started communication with the team in each unit to ensure the employee engagement in the implementation of balanced scorecard. The company updated the ‘CEO vision’ document. After development of strategic balanced scorecard the CEO of the company travelled to all 22 units personally and held meeting with managers as well as workers to have clear communication among all. The whole campaign of ‘balance scorecard’ was re-branded as ‘how we will win’ to convey a confident message to the organization.
What is Balance Score Card Plan
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Step 1- Assessment
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The institute consultant helped the company to salvage, artifact and repurpose the key elements of the vision. The leadership team then simplified the vision and made it based on recent organizational objective
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Step 2- Strategy
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The leadership team identified four strategic themes which further defined the action employees has to take to achieve the vision of the company
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Step 3- Strategic Objectives
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Leadership team selected theme teams to divide the work. Each theme team identified strategic objective in all four perspective. One such objective was to improve industry intelligences. All the separate objectives were then combined to make a single objective for development of Tier 1 strategic map.
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Step 4- Strategy Mapping
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In this step some new objectives were introduced and eliminated some objectives by combining it with a major vision. Total 40 strategic themes were grouped into 14 business objective.
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Step 5- Performance Measures
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Here the objective team decided the technique to measure the performance of employees on different aspects of vision. The meaningful indicators are selected and based on which targets are set for the employees.
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Step 6- Strategic Initiatives
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Leadership identified 20 initiatives which can be taken to improve employee performance.
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Step 7- Performance Analysis
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A corporate dashboard was launched in 2012 by Tolko’s IT department. This dashboard was used to monitor the performance.
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Step 8- Alignment
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Four internal facilitators were selected by company which will help the employee to understand the integrated framework of business. The employee understood about how to contribute to achieve the target and ultimately help the company to reach the strategic goal.
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Step 9- Evaluation
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The balance scorecard strategy map of Tolko was for the long period of 2-5 years. The leadership team carry out frequent meetings to review progress.
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The End Result
The balanced Scorecard helped Tolko to identify gaps in the alignment across the company. The strategy map developed using balanced scorecard act as a best communication tool; it was a breakthrough company needed which helped to move every employee forward with the vision of organization.
