Balanced Scorecard: Improve Your Organization's Performance and Profitability

BSC acts as a structured report that shows management’s performance. Key Performance Indicators (KPIs) can measure management’s contribution to performance and success. Companies can also use the stated goals or objectives as a benchmark to gauge their progress and compare it with the progress of their competitors.

As part of BSC, the company’s management can also demonstrate how their actions contribute to the company’s expansion and their impact on job promotions and salary reviews. A balanced scorecard must focus on a strategic issue pertinent to the organization and include financial and non-financial data to develop strategies.

History

Harvard University’s Dr. Robert Kaplan and Dr. David Norton created the Balanced Scorecard to measure organizational performance with a more balanced set of metrics. Traditionally, businesses have focused solely on short-term financial performance as a measure of success. The “balanced scorecard” introduced several non-financial strategic indicators to the mix to better concentrate on long-term success. Over time, the system has evolved into a fully integrated strategic management system.

In several articles and books, Dr. Kaplan, Dr. Norton, and Art Schneiderman at Analog Devices described this new strategy for large-scale management. In contrast to previous management methods, the balanced scorecard approach provides a clear prescription for what firms should track to “balance” their financial perspective.

Elements of a Balanced Scorecard

Strategic Objectives

Strategic Objectives are the activities required to implement strategic objectives into day-to-day operations for them to succeed. They break down vague terms like “mission” and “vision” into actionable steps.

Strategy Map

The most significant aspect of BSC is using strategy mapping to illustrate and communicate how the company generates value. A strategy map is a simple illustration depicting logical, cause-and-effect relationships between strategic objectives.

Key Performance Indicators (KPIs)

At least one indicator or KPI will be discovered and tracked for each objective on the strategy map. KPIs show whether you’re making progress toward the stated goal. Strategic KPIs assess the difference between actual and intended performance, evaluate organizational effectiveness, and measure operational efficiency.

Strategic Initiatives

The purpose of Strategic Initiatives is to assist the organization in achieving its Strategic Objectives and significantly impact the entire organization. Like any other project, they include a schedule, resources, action steps, progress, and expected outcomes, just like any other. Some are short-term (implementing in a few days), while others may take years to complete.

Cascading

The Cascading strategy focuses the organization as a whole on strategy and provides line-of-sight between employees’ work and high-level desired outcomes. Operational and tactical objectives, as well as performance measurement, emerge from the management approach. Each level of the organization is accountable based on its objectives and metrics. Every layer of responsibility has its own set of goals and benchmarks.

Cascading a balanced scorecard entails converting the corporate-wide scorecard (also known as Tier 1) down to first business units, support units, and departments (also known as tier 2) before teams or individuals (also known as tier 3).

Benefits

Balanced Scorecards are primarily beneficial for tracking businesses’ progress toward their goals and objectives. A scorecard outlines the criteria for measuring and weighting metrics for companies to ensure that all aspects of the organization receive proper attention.

In addition, the balanced scorecard approach can help businesses to:

• Communicate their strategy to all employees
• Align day-to-day operations with the company’s overall strategy
• Encourage employee involvement in the strategic planning process
• Set and track progress against specific goals and objectives
• Measure performance in a more holistic way, taking into account both financial and non-financial indicators

While BSC may require some initial effort to set up, the long-term benefits of using this approach to strategic planning can be significant. By taking a more holistic view of organizational performance, businesses can make better decisions about where to allocate resources and how to prioritize their efforts.

Use Case

Businesses may use BSCs for internal processes. For example, banks frequently contact consumers and conduct surveys to determine how well they do in their customer service. These surveys evaluate recent banking transactions, with questions ranging from wait times to the volume of interactions with bank personnel and overall happiness. It’s also possible to ask customers for suggestions for improvement. Bank executives can utilize this information to assist personnel if there are problems with service, as well as identify any issues consumers have with products, processes, or services.

The 4 Perspectives of a Balanced Scorecard

Customer Perspective

The customer viewpoint looks at how well the entity delivers value to its clients and determines the level of client satisfaction with the company’s goods or services. Customer happiness is a sign of a company’s success. How a firm treats, its customers may have an impact on its profitability.

The balanced scorecard assesses a company’s reputation against its rivals. How do your consumers perceive your firm compared to the competition? It permits organizations to step out of their comfort zones and evaluate themselves from the customer’s viewpoint rather than only from an internal perspective.

Customer comments might be valuable in several ways. One is improving product quality, enhancing the customer shopping experience, and lowering prices on key items and services.

Internal Business Perspective

Internal procedures impact how successfully a business runs. A well-balanced scorecard provides a framework for assessing the targets and aims that can aid the company in functioning more successfully. The scorecard also aids in the evaluation of a company’s goods or services and whether they meet customers’ expectations. One aspect of this viewpoint aims to answer the question, “What are we great at?”

The answer to that question may help firms devise marketing plans and develop new and improved services to satisfy customer demands.

Organizational Capacity Perspective

In terms of positive outcomes, organizational capacity is critical in achieving goals and objectives. Employees in the organization’s departments must demonstrate outstanding leadership, corporate culture, application of knowledge, and skill sets within their areas.

Proper infrastructure is necessary for the company to operate following management’s expectations. The organization should, for example, utilize the most up-to-date technology to automate processes and guarantee a consistent flow of operations.

Financial Perspective

A business aims to earn a return on its investments and manage significant risks in running its operations. By being able to do so, a company can achieve its objectives and ensure the satisfaction of investors, consumers, and suppliers.

Shareholders are an essential aspect of the company since they provide funding; when the firm achieves financial success, they should be pleased. Increasing profits and creating new revenue streams are among the goals they aim to achieve. A firm must first distinguish itself from competitors to expand its market share in the competitive industry. Improving the value proposition of the product or service, lower business costs, and introducing new products and services are some ways to accomplish this.

The 9 Steps in Developing a Balanced Scorecard

There are nine essential steps in creating a balanced scorecard:

Step 1: Assessment

An organization must agree on where it stands before mapping out its future. Assessment involves analyzing current internal and external environments. An organization often establishes or revalidates high-level strategic components (e.g., mission, vision, values, market studies, enablers and challenges, primary and secondary customer/stakeholder needs analysis) as part of this phase.

Step 2: Strategy

Organizations follow the strategy step by step to develop/clarify a plan to compete more effectively. In the strategy step, organizations build or define their customer value proposition, map out strategy using a Strategy Profile, and decompose the high-level strategic direction into three to four Strategic Themes (or goals). Strategic Themes are the focus areas in which an organization must excel to fulfill its purpose and goal, depending on the enablers it can leverage, the challenges it must overcome, and the client value proposition it must deliver.

Step 3: Strategic Objectives

This stage lays the groundwork for strategy. Implementation of effective strategic planning and management requires Strategic Objectives. Objectives are qualitative, long-term improvement goals (outcomes) critical to strategy success. Objectives are created on the strategic level and then combined at the organization level to create organizational objectives.

Step 4: Strategy Mapping

In strategy mapping, cause-and-effect connections are established between the Strategic Objectives, creating a “value chain” that depicts how pleased are consumers and stakeholders with the organization’s offerings. Each topic has its Strategy Map to ensure that the entire approach for achieving each primary aim is recorded and combined into a final organizational Strategy Map. The Strategy Map is a visual narrative of how the organization will achieve the objectives it set out to achieve.

Step 5: Performance Measures

KPIs are critical for monitoring the effectiveness of an organization’s plan. Operational indicators focus on resource utilization, procedures, and output. These measures aim to lead to specific outcomes, with some being more intermediate than others. For each objective on the strategy map, progress measures are created. This phase is all about assisting you in developing the key leading and lagging indicators required to manage strategy execution.

Step 6: Strategic Initiatives

In the Strategic Initiatives phase, the initiatives critical to the strategy’s success are established, prioritized, and implemented. Initiatives assist in closing performance gaps. Concentrating on the company’s most important strategic initiatives rather than a long list of options and projects is critical. Organizations struggle to implement their plan without this organized concentration.

Step 7: Performance Analysis

This step transforms information into knowledge and understanding based on evidence. Analyzing data can help people make better judgments, leading to enhanced strategic results. This stage is about assessing and evaluating performance to identify what works well and what doesn’t, as well as implementing changes and becoming a high-performance company.

Step 8: Alignment

The Alignment step aligns strategy from something only executives care about to something everyone supports, cascading high-level corporate strategy down through the company’s first business and support units before reaching individual employees. This stage includes the generation of scorecards for business and support units and employee and team scores.

Step 9: Evaluation

Evaluation is a time to assess, review, and update. In this stage, leaders and managers evaluate the effectiveness of the organization’s goals and how well the strategic management system improves communication, alignment, and performance. Integrating continuous improvement into day-to-day operations ensures that the strategic planning and management system is dynamic.