The Balanced Scorecard

The Balanced Scorecard (BSC) provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.

and enables organizations to clarify their vision and strategy and translate them into action.

BSC approach has its origins in a multi company study conducted during 1990.

The year-long study was motivated by the belief that the traditional financial accounting measures driving most performance measurement systems were becoming obsolete.

Representatives from a dozen organizations (manufacturing, service, heavy industry, and high tech) met bimonthly to develop a new performance measurement model that would help organizations to create future economic value.

Through various iterations and implementation experiences in a variety of organizations, the model evolved to its current format as a strategic management tool.
The underlying premise of the current model is that navigating through the competitive, technological, and capability-driven future requires much more than controlling financial measures of past performance.

How it works

Essentially, BSC complements financial measures of past performance with additional measures of the drivers of future performance.

In total, there are four perspectives reflected in BSC:

1. Financial

2. Customer

3. Internal business process

4. Learning and growth

Balanced Scorecard helps YOUR organizations to accomplish the following :

1-Clarify and translate business strategy.

A team of senior executive managers translates business unit strategies into specific strategic objectives.
In formulating these objectives, the team clarifies the organizational vision and gains consensus. This team-based step in the BSC creates a shared model of the entire organization to which everyone has contributed.

2- Communicate and link strategic objectives and measures.

The strategic objectives and measures are communicated throughout the company through newsletters, bulletin boards, videos, presentations, or electronically through e-mail, networks, etc.
This communication step signals to all employees that strategic objectives must be met if the organizational strategy is to succeed. Once employees understand the high-level objectives for their business units, they can develop local actions to help align their units to the organizational strategy.

3- Plan, set targets, and align strategic initiatives.

Senior executives set ambitious targets for the scorecard measures (e.g., ones that woulddramatically increase the stock price if the company is public, ones that double the return on investment capital, ones that double the growth rate). In turn, managers identify stretch targets for their customer, internal business process, and learning and growth objectives.
Customer satisfaction measures and benchmarking can be used to develop the stretch targets. Managers then identify all the initiatives that will be required to achieve the strategic breakthrough objectives.

4- Enhance strategic feedback and learning.

This step provides for organizational learning. Monthly and quarterly management reviews examine financial targets as well as the other Balanced Scorecard measures and whether the business units are achieving their stretch targets.
Monitoring allows adjustments to be made to support business units, or, if necessary, fundamental changes in the strategy can be made.

Now lets explain the four area of Balanced Score Card :

1- Financial perspective:

Financial measures summarize the readily measurable economic consequences of actions already taken. They answer the question: Is the organization’s strategy, deployment, and implementation contributing to bottom-line improvement? Examples of financial indicators include:

· Economic value added (EVA).

· Generation of cash flow.

· Operating income.

· Rapid sales growth.

· Return on capital employed.

· Return on net assets (RONA).

2-Customer perspective:

Through the customer perspective, business unit managers identify the customer and market segments in which their unit will compete as well as performance measures for these targeted segments.

Examples of core customer measures are:

· Customer satisfaction.

· Customer retention.

· New customer acquisition.

· Customer profitability.

· Market and account share for the targeted segments.

3- Internal business process perspective:

The internal business process perspective answers the question: What are the critical internal business processes in which the organization must excel? Internal business process measures enable the business unit to:

• Deliver value propositions that will attract and retain customers in the target market segments.

• Satisfy shareholder expectations of superior financial returns.

The internal business process perspective differs from traditional process measures. Where the traditional approach tends to focus on improving the efficiency of existing processes.

The Balanced Scorecard approach will usually identify entirely new processes at which the company must excel to meet customer and financial objectives (e.g., a new process to anticipate customer needs or one to deliver new services that targeted customers value). The Balanced Scorecard approach also attempts to incorporateinnovation in the new approaches.

4- Learning and growth perspective:

The learning and growth perspective identifies the infrastructure the organization must build to create long-term growth and improvement. The three principal sources of organizational growth and learning are people, systems, and organizational procedures.

The other three areas of the Balanced Scorecard will generally identify gaps between existing capabilities of people, systems, and procedures and what will be required to achieve breakthrough performance.
To close gaps, the organization must invest in re-skilling employees, improving information technology and other support systems, and aligning organizational procedures and routines.

The value of using the Balanced Scorecard

Combining financial and nonfinancial measures is not unique to the Balanced Scorecard approach.
But in traditional applications, organizations use financial and nonfinancial measures primarily for tactical feedback and control of short-term operations. The Balanced Scorecard provides more than a tactical or operational measurement system.

Innovative organizations use it as a strategic management system to manage strategy for long-term benefits. All together, the Balanced Scorecard translates organizational vision and strategy into objectives and measures across the balanced set of perspectives.

In addition to summary financial measures, the Balanced Scorecard helps an organization measure:

• How business units create value for current and future customers.

• How internal capabilities must be enhanced.

• What investments must be made in people, systems, and procedures to improve future performance.

Quality managers are instrumental in ensuring that their organizations use a broad-based system of measures rather than relying on purely financialmeasures.

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Balanced Scorecards Maximize Effectiveness  by Steve Hodlin