What is Balanced Scorecard?
Balanced Scorecard implies a strategic management tool that helps identify and level up the internal functions and their external outcomes. It is a tool of management that converts the organizational goals into a number of objectives. These objectives are gauged, analysed and changed whenever required to ensure that the organisation reaches its strategic goals effectively.
It is based on the assumption that the financial accounting metrics followed by the company are not enough for maintaining the performance of the company. This is because the company’s financials indicate the company’s past transactions only. It does not provide directions on where the company should be heading.
Balanced Scorecard is an integrated method of analysing the company’s strengths and weaknesses. It is a combination of various perspectives on the vision and strategy that provides an overall picture of the performance of the organization.
In addition, it is a modern approach to organizational strategy. Balanced Scorecard facilitates the companies to focus on their business functions and units as well as link them, with the strategy of the company. Further, it attempts to develop metrics, gather information and assess the performance from each perspective.
Who introduced the concept of a Balanced Scorecard?
David P. Norton and Robert Kaplan of Harvard Business School coined the concept of a Balanced Scorecard in the year 1992.
The company uses BSC to convey what the company is attempting to achieve. It also lines up the routine operations with the strategy. Further, it arranges the projects, products and services in the order of their priority. Moreover, it measures and keeps track of the progress towards the strategic targets.
Table of Contents
Characteristics of a Balanced Scorecard
Learning and Growth
It is assessed by investigating the training and knowledge resources. This ensures how effectively the information is gathered and how effectively the employees use it to translate the same for competitive advantage. It tends to develop and value teamwork.
It makes use of the parameter concerning innovation and organizational learning like operational process improvement and technological leadership
- How well is the firm constantly improving and creating value?
- How well the information is gathered?
- How well do the employees use that information to translate it into a competitive advantage?
Business Processes
Evaluation of business processes takes place by evaluating how effectively the manufacturing of products takes place. For this purpose, the company’s management analyzes its operations to check if there are any gaps, loopholes, shortages or wastages.
It makes use of the parameter that evaluates the effective execution of internal business processes. It includes productivity, cycle time, quality and cost.
- What must the company excel at?
- What are the core competencies and areas of operational efficiencies of the firm?
Customer Perspectives
It helps in ascertaining the level of customer satisfaction in terms of quality, product availability and especially price. They do so by analysing the feedback or reviews they leave about the product. It makes use of the data which comes directly from the customer’s input like time-bound delivery and product development.
- How do customers see the company?
- How satisfied are the company’s customers?
Financial Perspectives
Information related to sales, expenditure and income helps in understanding financial performance. It makes use of financial metrics like market share growth, cash flow and return on equity.
- How do shareholders perceive the company?
- How is the company doing for their shareholders?
Using these perspectives in a combined manner helps the management ascertain whether the company is heading towards the right direction, i.e. its vision.
Further, there are two more perspectives of an extended balanced scorecard:
Workforce Perspective
It makes use of parameters concerning skills, psychology, attitude, and sociology of the workforce.
- How prepared is the firm’s workforce?
Networking Perspective
It makes use of criteria like resources, positions, capabilities, and commitment of network partners, etc.
- How dynamic are the firm’s network partners, suppliers and collaborators?
Benefits of a Balanced Scorecard
- It allows firms to pool together information into a common report instead of dealing with several tools.
- BSC facilitates management to use time, money, and resources effectively if they require implementation of reviews to improve procedures and operations.
- It provides the company with valuable information about the firm’s service and quality along with the financial track record.
- Using these metrics, executives can give the right training to the employees and provide them with the guidance and support they will need.
- It helps the firm in reducing its reliance on incompetencies in the process.
Example
You might have observed that all the apps on your mobile phone often ask you to rate and review them. This is just one of the surveys that they use as a metric to improve their customer service and satisfaction. These apps also ask you to give suggestions for improvement.
Wrap Up
All in all, a balanced scorecard provides management feedback on internal processes and external results. This facilitates the improvement of performance and results. It is a report that measures the performance of the company’s management.