Balanced Scorecard

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Main Findings

• The Balanced Scorecard helps organizations balance different aspects of performance, communicate their strategy clearly, align their departments and divisions, and link their individual goals to the organizational strategy.
• However, the Balanced Scorecard also has some limitations such as complexity, choice of indicators, alignment, and implementation that need to be addressed carefully.

A balanced scorecard (BSC) is a strategic management tool that helps companies measure and improve their performance in four key areas: financial, customer, business process, and learning and growth.

It was developed by Robert Kaplan and David Norton in 1992 as a way to balance the traditional financial metrics with the non-financial ones that are essential for creating value.

A balanced scorecard is a framework that aligns the vision, mission, and goals of an organization with its strategy and actions. It translates the strategy into a set of objectives, measures, targets, and initiatives for each of the four perspectives: financial, customer, business process, and learning and growth.

The financial perspective focuses on how the organization creates economic value for its shareholders. The customer perspective focuses on how the organization meets the needs and expectations of its target market.

The business process perspective focuses on how the organization delivers its products or services efficiently and effectively. The learning and growth perspective focuses on how the organization develops its human, information, and organizational capital to support its strategy.

Why use a balanced scorecard?

A balanced scorecard helps organizations to:

• Communicate their strategy clearly and consistently to all stakeholders.
• Align their activities and resources with their strategic priorities.
• Monitor and evaluate their progress and performance against their goals.
• Identify and address gaps and opportunities for improvement.
• Foster a culture of learning and innovation.

By using a balanced scorecard, organizations can achieve a better balance between short-term and long-term objectives, between financial and non-financial measures, and between internal and external perspectives.

How to formulate a balanced scorecard?

To formulate a balanced scorecard, an organization needs to follow these steps:

• Define its vision, mission, and values.
• Conduct a SWOT analysis to assess its strengths, weaknesses, opportunities, and threats.
• Identify its strategic themes and objectives for each of the four perspectives.
• Select the appropriate measures, targets, and initiatives for each objective.
• Create a strategy map to show the cause-and-effect relationships among the objectives.
• Implement the balanced scorecard across the organization.
• Review and update the balanced scorecard periodically.

How to calculate a balanced scorecard?

To calculate a balanced scorecard, an organization needs to collect data on its measures, compare them with its targets, and calculate the performance gaps. The performance gaps indicate how well or poorly the organization is achieving its objectives.

The performance gaps can be expressed as percentages, ratios, or scores. For example, if an organization has an objective of increasing customer satisfaction by 10%, and its measure is the average rating of customer surveys, it can calculate its performance gap as follows:

Performance gap = (Actual rating - Target rating) / Target rating

If the actual rating is 8 out of 10, and the target rating is 9 out of 10, then the performance gap is:

Performance gap = (8 - 9) / 9 = -0.11 or -11%

This means that the organization is falling short of its customer satisfaction objective by 11%. The organization can then use this information to identify the root causes of the problem and take corrective actions.

Examples

To illustrate how the balanced scorecard works in practice, let's look at some examples of companies that have used it successfully.

Apple

Apple is known for its innovative products and loyal customers. The company uses the BSC to align its vision of creating products that enrich people's lives with its financial, customer, internal process, and learning and growth objectives.

For example, some of the indicators that Apple tracks are customer satisfaction, market share, revenue growth, product quality, employee engagement, and research and development spending.

Starbucks

Starbucks is a global coffee chain that aims to inspire and nurture the human spirit through its coffee and social responsibility. The company uses the BSC to measure and improve its performance across four perspectives: financial, customer, social responsibility, and partner (employee).

Some of the indicators that Starbucks monitors are net revenue, operating income, customer loyalty, customer satisfaction, community involvement, environmental impact, partner satisfaction, and partner retention.

Hilton

Hilton is a leading hospitality company that operates thousands of hotels and resorts worldwide. The company uses the BSC to align its mission of being the most hospitable company in the world with its strategic goals and initiatives.

Some of the indicators that Hilton measures are revenue per available room (RevPAR), market share, guest satisfaction, loyalty program membership, employee engagement, employee turnover, operational efficiency, and innovation.

Limitations

The balanced scorecard is a powerful tool for strategic management, but it also has some limitations that need to be considered. Some of the common challenges or drawbacks of using the BSC are:

Complexity

Setting up and managing a BSC can be complex and require a lot of time and resources. This can be particularly difficult for small businesses or organizations with limited resources or expertise.

Choice of indicators

Choosing the right performance indicators can be a challenge. Poorly chosen indicators can give a distorted picture of performance or lead to unintended consequences. For example, focusing too much on financial indicators can neglect other important aspects of performance such as customer satisfaction or employee development.

Alignment

Aligning the BSC across different levels and units of the organization can be challenging. Different units may have different objectives, priorities, or perspectives that may not be compatible with the overall strategy or vision. This can create confusion or conflict among managers and employees.

Implementation

Implementing the BSC requires a strong commitment and support from top management and stakeholders. Without clear communication and buy-in from all parties involved, the BSC may not be effective or sustainable. Moreover, implementing the BSC requires constant monitoring and evaluation to ensure that it is relevant and up to date with changing conditions.

Conclusion

The balanced scorecard is a popular and widely used framework for strategic management that helps organizations measure and improve their performance across four perspectives: financial, customer, internal process, and learning and growth.

The BSC helps organizations balance different aspects of performance, communicate their strategy clearly, align their departments and divisions, and link their individual goals to the organizational strategy. However, the BSC also has some limitations such as complexity, choice of indicators, alignment, and implementation that need to be addressed carefully.

References

• Kaplan R.S., Norton D.P., 1996. The Balanced Scorecard: Translating Strategy into Action. Harvard Business Review Press.
• Kaplan R.S., Norton D.P., 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business Review Press.
• LogRocket Blog (2023). What is a balanced scorecard? Examples and template. https://blog.logrocket.com/product-management/balanced-scorecard-examples-template/
• Smartsheet (2017). Balanced Scorecard Examples and Templates. https://www.smartsheet.com/balanced-scorecard-examples-and-templates
• ClearPoint Strategy (2024). A Thorough List Of Balanced Scorecard Advantages & Disadvantages. https://www.clearpointstrategy.com/blog/thorough-list-of-balanced-scorecard-advantages-disadvantages
• Wevalgo (n.d.). Balanced Scorecard approach (BSC): definition, limits and benefits. https://www.wevalgo.com/know-how/operational-excellence/performance-management/balanced-scorecard

FAQ

A Balanced Scorecard is a performance measurement framework that adds strategic non-financial performance measures to traditional financial metrics. This provides a more ‘balanced’ view of organizational performance.

The four perspectives of the Balanced Scorecard are: Financial, Customer, Internal Process, and Learning & Growth.

A Balanced Scorecard helps an organization align its strategic objectives with its operational activities, provides a clear prescription for what companies should measure in order to ‘balance’ the financial perspective, and helps to improve internal and external communications.

Yes, a Balanced Scorecard can be adapted to any type of organization, regardless of size or industry. It is a flexible tool that can be customized to fit the unique needs of each organization.

Strategy maps are a visual representation of a company’s strategic objectives, organized by the Balanced Scorecard perspectives. They help to illustrate how various objectives link together to drive overall performance and strategy execution.