Strategic planning is an essential activity in any organization. It sets priorities, supports the operations, focuses on resources, and ensures that all the stakeholders and employees work towards a common goal. To follow up with the strategic planning and performance management framework, a balanced scorecard (BSC) is used. It provides an easy platform to track financial and non-financial measures to find out the organization’s success and when remedial actions are required.
The balanced scorecard is used by government, business, and non-profits that would bring into line the various daily activities. The financial and non-financial measures are tracked using a balance scorecard to regulate the degree of the company’s growth and success and the time to execute the remedial actions if required.
The balanced scorecard is a popular management tool especially made use in the United States, Northern Europe, UK, and Japan. Organizations that look forward to a consistent performance gets more benefit out of it. A Balance scorecard requires a good effort to implement and provides and effective outcomes. To make it successful, an organization must have the required skilled resources to make the balances scorecard a great success.
It is researched and proved that any organization that makes use of a balanced scorecard approach would tend to outclass organizations that do not use this tool. The main benefits of the balanced scorecard are:
- Improved Strategic Planning – The balanced scorecard offers a wonderful framework to build and communicate strategy. A strategy map helps to display the business model that helps managers to reflect on causes and effect relations that occurs between the various strategic objectives. When the strategy map is in place, it ensures that an agreement is reached on a set of consistent strategic objectives. It also helps to identify the main drivers of further process and performance and creates a whole picture of strategy.
- Improved Execution and Strategy Communication – When the strategy picture is clear on one page, it becomes easy for the companies to pass on the strategy to internal and external stakeholders. The plan seen on the page makes it easy for the staff and others to understand the strategy easily to deliver it and review it as well.
- Aligning with Projects and Initiatives – The balanced scorecard guides organizations to map their projects and various initiatives to various strategic objectives. This would ensure that there is a tight focus on the project and its initiatives to deliver the objectives aligned to the strategic.
- Improved Management Information –The balanced scorecard method guides the organization to design the Key Performance Indicators for their strategic objectives. This would make definite that the company only measures what is mandatory for them. Companies that makes use of a balanced scorecard method involves in a better decision-making approach and generate high-quality management.
- Improved Performance Reporting – The balanced scorecard method guides the organization to design dashboards and performance reports. This would make sure that the organization is taking care to address the most urgent and important strategic issues and helps the companies to monitor their execution plan.
- Improve on Alignment with the Organization – The balanced scorecard enables the organization to align the organizational structure with the objectives. For the proper execution of a plan, the company should ensure that all the business units work towards the same goals.
- Improved Process Alignment – A properly placed balanced scorecard guides the organization process to be aligned like risk management, risk analytics, budgeting, etc.
Four Perspectives of Balance Scorecard
The balanced scorecard depends on four main perspectives to monitor. Most of the company makes use of these four points to measure performance. Below points lists them:
The balanced scorecard makes use of various financial performance like the return on investment and net income as all the for-profit organizations make use of them. The financial performance measures have a common language to analyze and compare various companies.
Many financial institutions and shareholders who provide funds to companies depend on the financial performance measures to decide on lending funds or invest funds. If the financial measures are designed properly, it provides an overall view of where the organization stands and its success. As such, financial measures by itself does not initiate or provide incentives for success.
Financial measures highlight the past story but do not do any predictions. Financial measurement shows its success by projecting the following information in the database:
1.1 Historical Data
This data shows the performance of the previous week, month, year, etc. From the financial position, the main aim of the business to generate income. The historical data guides an organization to keep its financial score high. These data always focus on the past and it is basis the events that have already occurred.
The analysis of the net profit for the year against the previous year, the sales revenue of the company, and the stock price are all based on the historical data. The various financial information that relates to the stakeholders and shareholders, all fall into the historical data.
1.2 Current Data
This data shows the existing status of what is in now. This data measures the current financial results and denotes the cash a specific business has on hand. It also denotes the total asset value in comparison to the liabilities. This data also provides the answer as to the way the business performs as of now.
1.3 Future Data
This data shows what would materialize in the future, after a few months or years. This financial data predicts the financial performance of the company in the future. Using these estimates, the company can plan for further resource allocation. Yet another common estimation would be the amount that is invested in research and development against the sales revenue
. During a financial crisis, most of the organizations would cut down the costs to compensate for other urgent financial requirements. For example, in case the company looks to expands its business into a new market, then the growth in sales for that specific region and domain would be futuristic statistical data.
2. Customer Perspective
Managers require to identify the market and customer segments where the business will compete and excel. This is performed in the customer perspective included in the balanced scorecard. Each business unit is measured against the targeted segments.
The customer perspective in the balanced scorecard includes many generic measures that are successful from a well-formed strategy. The main outcome of this would be customer satisfaction, new customer acquisition, customer retention, customer profitability, and market share in the target segments.
The customer perspective in the balanced scorecard includes a few value propositions specific measures that a company would deliver to its target market customers. The main measurement group of customer outcomes is general for all types of organizations. The core measurement includes the following:
2.1 Market Share
This measurement indicates the value of the business in its respective market. This would be in terms of the number of customers that the business has, the amount spent for the business, unit volume sold, etc. All these relate to the business unit.
2.2 Customer Retention
This measurement tracks the rate with regards to the absolute or relative terms. Here, the rate indicates the way in which a company attracts and gain new business or customers.
2.3 Customer Acquisition
This measurement tracks the rate with regards to the absolute or relative terms. Here, the rate indicates the way in which a business unit holds or preserves an existing relationship with their customer.
2.4 Customer Satisfaction
This measurement evaluates the customer satisfaction level against specific parameters.
2.5 Customer Profitability
This measurement evaluates the customer net profit after setting apart the unique expense involved to support the customer.
3. Internal Business Process Perspective
In the internal business process perspective of the balanced scorecard, the manager would recognize the critical internal process where the organization must excel. Using this process, a business can:
- Bring the value proposition to attract and hold the customers in targeted market segments.
- Gratify the expectations of the shareholder
The main key to excelling for any organization is to hold its processes to generate dependable products and services. When the processes are performed systematically it leads to consistent product levels and increases the service quality. The main tough point here is to find the variables of the right process that is used to measure and set right the appropriate standards. This measure is monitored daily or per week basis. Few of the process variables are observed closely to make sure that the products and services are produced and delivered with superior quality.
When products and services attain a good level, then the customers and satisfied that would reflect in the business growth. To attain consistently great performance, an organization needs to have a control on its inputs. The main inputs for a good performance are knowledge and quality from the main suppliers. The internal business process measures grant the required data to predict and control the product’s and service’s quality. When there is an issue with a product or service, the process data would be able to tell the exact cause for it. As it is unstated that the outcomes are significant for all organizations. An organization measures the process in the following way:
- For all the key process, cycle time is measured
- Rework time and its related costs are tracked for the main production and its delivery
- The main productivity measures are acknowledged and traced appropriately
- Process measures have been defined in each unit
- Standard goals set for all process
4. Learning and Growth Perspective
For encouragement purposes, the learning and growth perspective emphasizes people’s capabilities. Managers should be involved in the development of employee capabilities. The main parameters to measure the performance of a manager would be employee satisfaction, retention, and productivity.
This measure denotes how satisfied an employee is. It indicates the importance of employee morale that helps to improve productivity, quality, responsiveness, and customer satisfaction. Employee satisfaction can be measured by employee interaction or interviewing, sending surveys to employees, or observing employees at work.
Organizations are dedicated to retaining employees who tend to develop intellectually that are confined to the organisation. Also, the organisation should sustain costs when they come across decent talent to substitute people who leave the company.
An organization should measure employee retention and it is the inverse of employee turnover, that is, the percentage of people who leave the organization per year.
Employee productivity is very important for an organization and it projects the importance of output per employee. An employee is liable to create physical output in terms of miles drive with work or financial output in terms of profits and revenue per employee.
For example, a number of loans sanctioned and processed per month would measure the productivity for loan officers at a bank. Having this, employee satisfaction is measured considered the other two measures of employee retention and productivity. A manager gets a good incentive who generates high employee satisfaction and productivity and low employee turnover.
Balanced scorecard is an effective management tool that mainly focuses to integrate and breakdown the strategic goal of an organization. Its main goal is aligned with the organization’s goal and then convert the strategy into actions.
The main measurements to address the short- and long-term objectives and targets are financial targets, internal business processes, customer satisfaction, and learning and growth performance. If the balanced scorecard is used effectively for all business units, it would show the right result.