Practical Application of Balanced Scorecard

The Balanced Scorecard was first presented by Robert Kaplan and David Norton from Harvard Business School in an article “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, January/February 1992. It is claimed that the scorecard with four perspectives- financial, customers, internal business processes, and innovation, learning and growth provides an excellent balanced solution for facing these challenges. The concept of the balanced scorecard enables organizations to achieve an integrated and aligned balanced focus between these four perspectives, which collectively underpin the achievement of the organization’s vision. (Meena. C, 2009).

High-quality services, intellectual capital, skilled employees, prompt and reliable services, responsiveness efficient and adaptable business processes are all intangible assets which are important but their presence or absence does not show up on a balance sheet and does not alert employees, customers, shareholders and the community to the real worth of a company or enterprise. As such the Balanced scorecard emphasizes that financial and nonfinancial measures are all part of a system that gives information to every part of the organization (Brewer and Speh, 2000).

The process of a Balanced Scorecard (Meena. C, 2009)

• Clarify and translate vision into strategy
• Communicate and link strategic objectives and measures
• Plan, set targets and align strategic initiatives 
• Enhance strategic feedback and learning

Traditionally, organizations measured their performance on short-term financial measures; however, the Balanced Scorecard approach extends this to include measures of performance relating to customers, internal processes and learning and growth needs of their people (Latshaw and Choi, 2002). This broader focus brings in a longer-term, strategic dimension to the business, by not only looking at the short-term financial performance but also at how the organization is going about delivering the results and checking on the overall “strategic health” of the organization. By also focusing on these non-financial dimensions, the organization can assess its performance in building key capabilities, required in terms of its strategy to survive and prosper into the future. This is particularly relevant to companies seeking longer-term superior returns, embarking on new strategies or under competitive threat, where the lack of these organizational capabilities will threaten the organization’s longer-term sustainability (Hagood and Friedman, 2002). 

The Balanced Scorecard approach extends into linking employee rewards to performance in all four areas, with suitable weightings applied reflecting the relative importance of each area. In some instances, companies see the non-financial measures of such importance that a “threshold” level of performance is set for each of the non-financials. Only if an individual exceeds these threshold levels, can they qualify for performance-related rewards linked to the financial performance results. This approach clearly indicates to employees the level of importance the organization places on future capability-building and strategic issues, while at the same time recognizing shorter-term financial performance (Gadenne, 2000). 

Besides, metrics drive organizational actions by identifying the area that is needed to be changed. Kaplan and Norton (1992) emphasized that metrics should always be aligned with a strategy to attain success. Strategic decision processes are shaped by various contextual variables. Researchers on strategic decision making have claimed that the most important variable is performance measurement. Measures help in evaluating alternatives and making a decision. Based on the performance criteria, researchers can arrive at different conclusions. (Elbanna and Child, 2007). 

A Balanced Scorecard is a format for describing the activities of an organization through a number of measures for each of the four perspectives (Meena. C, 2009). A simplified balanced scorecard may resemble Figure 01. Business activity is described from four different perspectives, using a small number of measures for each. The description may refer to the business’s current performance or to its goals for the next period (Brown and McDonnell, 1995).

 

Figure 01 - Basic Design of A Balanced Scorecard Performance

Source: Kaplan and Norton, 1993

1. Financial Perspective: (to succeed financially) 

• Return on capital
• Improved shareholder value
• Asset utilization 

2. Customer Perspective: (to achieve company vision and appear to customers)

• Product/service attributes
• Customer relationships
• Image and reputation

  3. Internal Business Perspective: (to satisfy our shareholders and customers)

• Develop products and services
• Deliver products and services
• “Post-sales” services

4. Learning and Growth: (to achieve company vision and ability to change and improve)

• Employee capabilities
• Information system capabilities
• Motivation
• Empowerment and alignment

The balanced scorecard contains a diverse set of performance measures, spanning financial performance, customer relations, internal business processes, and the organization’s learning and growth activities (Kaplan and Norton, 1992). This large set of measures is designed to capture the firms’ desired business strategy and to include drivers of performance in all areas important to the firm (Kaplan and Norton, 1993). The use of the Balanced Scorecard should improve managerial decision making by aligning performance measures with the goals and strategies of the firm and the firm’s business units (Lipe and Salterio, 2000). 

References:

• Brewer, P.C. and Speh, T.W., 2000, “Using the balanced scorecard to measure supply chain performance”, Journal of Business Logistics, Vol. 21 No. 1, pp. 75-93

• Brown, P.C. and McDonnell, B., 1995, “The balanced scorecard: short-term guest or long-term resident”, International Journal of Contemporary Hospitality Management, Vol. 7 No. 2, p. 7-11

• Elbanna, S. and Child, J., 2007, ‘The Influence of Decision, Environmental and Firm Characteristics On The Rationality Of Strategic Decision-Making”. Journal of Management Studies, 44(4), p. 561-91

• Gadenne, D., 2000, “Brave new world: how can business meet new challenges in the 21st century”, inaugural professorial lecture, 6 September, Central Queensland University, Rockingham 

• Hagood, W.O. and Friedman, L., 2002, “Using the balanced scorecard to measure the performance of your HR information system”, Public Personnel Management, Vol. 31 No. 4, p. 543-57

• Kaplan, R.S. and Norton, D.P., 1992, “The balanced scorecard – measures that drive performance”, Harvard Business Review, Vol. 70 No. 1, p. 71-90

• Kaplan, R.S. and Norton, D.P., 1993, “Putting the balanced scorecard to work”, Harvard Business Review, Vol. 71 No. 5, p. 134-47

• Latshaw, C.A. and Choi, Y., 2002, “The balanced scorecard and the accountant as a valued strategic partner”, Review of Business, Vol. 23 No. 1, p. 27-9

• Lipe, M.G. and Salterio, S.E., 2000, “The balanced scorecard: judgmental effects of common and unique performance measures”, The Accounting Review, Vol. 75 No. 3, pp. 283-86

• Meena Chavan., 2009, "The balanced scorecard: a new challenge", Journal of Management Development, Vol. 28 Issue 5, p. 393 - 406