Balanced Scorecard

Abstract

The balanced scorecard: is a system teams and organizations use to plan and manage strategies and improve performance. The system helps the team to communicate what they are trying to accomplish aligning their day-to-day work with the strategy, prioritizing measuring, and monitoring the progress toward strategic targets. This paper will explain the idea behind the concept of the balanced scorecard and demonstrate how well this system can be used in any organization to achieve its strategic goals it will study and evaluate its pros and cons by highlighting some of the companies that use this system and tackling its nonfinancial measures.

Introduction

The concept of a balanced scorecard comes from the idea of looking at strategic measures in addition to traditional financial measures to get more balanced views of performance, it was first introduced in 1992 by Dr. Robert Kaplan and Dr. David Norton, and this concept captures value creation of four perspectives which helps business measure all the activities essential to creating values. (Catherine, 2023)

The idea behind a balanced scorecard revolves around a detailed framework aimed at effectively overseeing strategies and linking the pieces together within strategic planning and management. According to Robert S. Kaplan's article, in his words, he said: “Norton and I believed that if a company is to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their systems”. Their interest in this belief arose from a prominent British scientist called Lord Kelvin who said in his words “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind”, they believed that measurement was essential to managers as it was for the scientists. (Robert S. Kaplan's 2009)

The balanced scorecard enables teams to observe the interconnection between different projects and initiatives, alongside the metrics employed to monitor their progress. It also aids in aligning these endeavors with the overarching strategic goals that organizations aspire to achieve, all while staying true to the organization’s mission, vision, and overall strategy. The following are the four perspectives and how they serve their purposes within an organization:

The?Financial Perspective?evaluates an organization’s financial performance, including profitability, revenue growth, cost management, and return on investment. Key metrics encompass sales revenue, operating expenses, net income, and asset utilization. It addresses questions like the organization’s financial health and value creation for shareholders.

The?Customer Perspective?focuses on understanding how customers perceive the organization and its offerings. Metrics include customer satisfaction, loyalty, retention rates, and market share. By assessing quality, delivery speed, and customer service experience, companies align their efforts with customer needs.

The?Internal Business Process Perspective?examines processes that drive customer value and overall success. Metrics cover operational efficiency, innovation, compliance, and social responsibility. Examples include process cycle time, defect rates, and adherence to regulatory standards.

Lastly, the?Learning and Growth Perspective?considers an organization’s capacity to learn, adapt, and grow. It assesses employee skills, knowledge transfer, technology adoption, and alignment with strategic goals, emphasizing capabilities for the future.?These four perspectives use four different metrics namely Objectives, Measurements, targets, and initiatives to achieve their vision. (Robert S. Kaplan and David P. Norton 2014)

While the balanced scorecard delivers many advantages it also has some disadvantages for the organization to consider while employing this approach. In the next session, we will assess some of the pros and cons of a balanced scorecard according to Barrazacarlos.com:

Pros

The Complete measurement: The balanced scorecard offers an overview of an organization's performance holistically, it takes into account different perspectives such as financial, customer, internal process, and learning and growth, and it makes sure that all fundamental aspects of performance are taken into consideration, delivering a complete assessment. It offers a Strategic Alignment by interconnecting different performance metrics to the organization's strategic plan, and activities are aligned with the overall strategy, by ensuring that departments and individuals have a comprehensive view of how their inputs add value to the overall strategic goals achievement. Performance measurements: the BSC allows organizations to trace progress, track performance across different dimensions, identify the key performance indicators and facilitate data-driven decision-making. Transparency: A balanced scorecard chart is easy to understand, its visualization provides meaning and delivers understanding to the stakeholders by demonstrating how it aligns with their expectations, which fosters trust and enhances relationships with all stakeholders.

Cons

Challenges in implementation: the fact that applying the balanced scorecard requires careful planning and a deep understanding, some challenges arise as the right metrics are being defined, goals are being set, and the scorecard is being integrated across various departments. It can be time-consuming and complex to implement correctly.? The implementation process can face resistance as culture is being changed this requires a shift in mindset and time to embrace the new change, especially for employees who are accustomed to traditional systems. Data Overload to measure performance effectively, there is a need to access reliable and timely data, the bulkiness of organizational data can make it hard to go through all of them to deliver on time. Costly, maintaining this system can be costly for it might require investment in technology, training, and data management systems.

Various companies use balanced scorecards to align their plans and operations to achieve their business goals and the following is the list of a few that adopted this system in order to align operations with their goals. (Redaction Team, 2023)

-?????? Ford Motor Company, Volkswagen, Wells Fargo and Citibank, TD Canada Trust, Philips Electronics, Coca Cola to name a few.

The following are examples of ways of using nonfinancial performance measures:

Key performance indicators encompass a wide range of areas crucial for organizational success. Customer satisfaction can be gauged through metrics like Net Promoter Score (NPS) and Customer Satisfaction Index (CSI), providing insights into loyalty and overall satisfaction. Similarly, monitoring employee engagement through surveys, turnover rates, and feedback mechanisms offers valuable information about morale, productivity, and commitment levels. Quality metrics play a vital role in evaluating process efficiency and effectiveness, including defect rates, product/service quality assessments, and adherence to Six Sigma standards. Innovation metrics track success in innovation by measuring factors such as the number of patents filed, new product launches, and investment in research and development. Operational efficiency is measured by metrics related to cycle time, resource utilization, and waste reduction to indicate the organization's operational effectiveness. Addressing environmental impact involves sustainability metrics like carbon footprint, water usage, and waste management, while health and safety metrics ensure workplace safety by tracking lost-time incidents, safety training compliance, and near-miss reporting.

Application

Let's assume implementing the Balanced Scorecard in a volunteer organization focused on environmental conservation. The organization's mission is to protect and preserve natural habitats and wildlife through advocacy, education, and community engagement. The following are perspectives and Metrics

Financial Perspective: Metric - Grant funding secured, donation revenue, and cost per program. Customer Perspective: Metric - Community engagement levels, event attendance, and feedback on education programs. Internal Processes Perspective: Metric - Number of conservation projects initiated, efficiency of volunteer recruitment and training, and impact assessment of programs implemented. Learning and Growth Perspective: Metric - Volunteer retention rate, training hours completed, and employee satisfaction surveys.

Incorporating People at all levels:

- Engaging Leadership: The leadership team will be involved in setting strategic objectives, defining key performance indicators, and aligning goals with the organization's mission.

- Empowering Employees: Volunteers and staff members will be involved in defining metrics that directly impact their work, providing feedback on the effectiveness of programs, and participating in continuous improvement initiatives.

- Transparent Communication: Regular communication channels will be established to ensure that everyone understands how their efforts contribute to the organization's overall success and impact.

Measurement Strategy:

- Cause and Effect: By tracking financial metrics like grant funding secured, the organization can invest in more conservation projects which can lead to increased community engagement and support, thereby positively impacting financial sustainability.

- Feedback Loop: Volunteer retention rates can be measured to assess the effectiveness of training programs and employee satisfaction, leading to adjustments in internal processes to improve volunteer engagement and overall organizational performance. By incorporating feedback and engaging people at all levels, the Balanced Scorecard in this organization can effectively measure the strategy, foster a culture of continuous improvement, and drive sustainable impact in environmental conservation efforts.

Incorporating current trends in business such as Environmental, Social, and Governance (ESG) factors, diversity and inclusion considerations, and environmental concerns into the balanced scorecard can significantly enhance the strategic planning and performance measurement processes of organizations. For example, organizations can introduce new metrics related to sustainability goals, carbon footprint reduction targets, and community impact initiatives under the environmental pillar of the balanced scorecard. Additionally, metrics that focus on diversity and inclusion efforts, such as representation in leadership roles, employee engagement surveys around inclusion, and diversity training participation rates, can be included under the social aspect of the balanced scorecard. Moreover, governance metrics like ethical business practices, board diversity, and compliance standards can be integrated to ensure alignment with governance best practices. By incorporating these modern business trends into the balanced scorecard framework, organizations can demonstrate their commitment to sustainability, diversity, and ethical business practices while driving overall performance and strategic success.

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?Reference

- Catherine Cole 2023, what is a balanced scorecard, https://onlie,hbs.edu/blog/post/balanced-scorecard.

- Robert S. Kaplan 2009, Conceptual Foundation of the balanced Scorecard, Harvard Business School, Microsoft Word - Conceptual Foundations of the Balanced Scorecard_3.17.10.doc (hbs.edu)

- Redaction Team 2023, 10 Advantages and disadvantages of balanced scorecard, Barraza Calros.com 10 Advantages and Disadvantages of Balanced Scorecard (barrazacarlos.com)

- Robert S. Kaplan and David P. Norton 2014, the Explainer: The Balanced Scorecard, Harvard Business Review, The Explainer: The Balanced Scorecard - HBR Video

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