9.2 Balanced scorecard
8 min read•august 20, 2024
The is a strategic management tool that measures organizational performance beyond just financials. It includes customer, internal processes, and learning perspectives to provide a holistic view of success. This approach helps align strategy with operations and drives long-term growth.
Developed in the 1990s, the balanced scorecard addresses limitations of traditional financial metrics. By considering multiple perspectives, it enables better decision-making and strategy execution. However, challenges include selecting the right metrics and adapting to change.
Balanced scorecard overview
- The balanced scorecard is a strategic management tool that provides a comprehensive framework for measuring and managing organizational performance
- It goes beyond traditional financial metrics to include non-financial measures that are critical to long-term success and align with the organization's strategy
- The balanced scorecard helps translate an organization's vision and strategy into a set of performance measures across four perspectives: financial, customer, , and
Origins of balanced scorecard
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- The balanced scorecard was developed by Robert Kaplan and David Norton in the early 1990s as a response to the limitations of traditional performance measurement systems that focused solely on financial metrics
- Kaplan and Norton recognized that relying only on financial measures could lead to short-term thinking and a lack of investment in the capabilities needed for future success
- They proposed a balanced approach that considered both financial and non-financial measures, as well as leading and lagging indicators of performance
Four perspectives of balanced scorecard
- The balanced scorecard organizes performance measures into four distinct perspectives: financial, customer, internal business processes, and learning and growth
- Each perspective represents a critical aspect of the organization's performance and helps ensure a balanced view of overall success
- The four perspectives are linked together in a cause-and-effect relationship, with the learning and growth perspective driving improvements in internal processes, which in turn lead to better customer outcomes and ultimately financial results
Financial perspective
- The focuses on the organization's financial performance and how it creates value for shareholders
- It includes traditional financial measures such as revenue growth, profitability, and return on investment
- The financial perspective helps ensure that the organization's strategy is financially viable and that it is generating sufficient returns to sustain operations and invest in future growth
Objectives of financial perspective
- Increase revenue growth through new products, services, or markets
- Improve profitability by reducing costs or increasing efficiency
- Maximize shareholder value through higher returns on invested capital
- Ensure sufficient cash flow to meet short-term obligations and invest in long-term growth
Metrics for financial success
- Revenue growth rate
- Operating margin
- Return on equity (ROE) or return on assets (ROA)
- Economic value added (EVA)
- Cash flow from operations
Customer perspective
- The focuses on how the organization creates value for its customers and how it measures and loyalty
- It includes measures related to customer acquisition, retention, and profitability, as well as customer perceptions of the organization's products, services, and brand
- The customer perspective helps ensure that the organization is delivering the right value proposition to its target customers and building strong relationships that will drive long-term success
Objectives of customer perspective
- Increase market share by attracting new customers or expanding into new segments
- Improve customer retention by delivering high-quality products and services and providing excellent customer support
- Enhance customer profitability by cross-selling or upselling additional products and services
- Strengthen brand reputation and customer loyalty through consistent and positive customer experiences
Metrics for customer satisfaction
- Customer acquisition rate
- Customer retention rate
- Customer profitability
- Net Promoter Score (NPS) or customer satisfaction index
- Brand awareness and perception
Internal business processes perspective
- The internal business processes perspective focuses on the key operational processes that enable the organization to deliver value to customers and achieve its financial objectives
- It includes measures related to quality, efficiency, innovation, and regulatory compliance
- The internal business processes perspective helps identify areas for improvement and ensures that the organization is optimizing its operations to support its strategy
Objectives of internal processes
- Improve product or service quality to meet or exceed customer expectations
- Increase operational efficiency to reduce costs and improve margins
- Accelerate innovation to develop new products, services, or business models
- Ensure compliance with regulatory requirements and industry standards
Metrics for operational efficiency
- Defect rate or quality index
- Cycle time or throughput
- Cost per unit or operating expense ratio
- Number of new products or services launched
- Regulatory compliance rate
Learning and growth perspective
- The learning and growth perspective focuses on the organization's ability to develop and retain the skills, knowledge, and culture needed to execute its strategy and drive long-term success
- It includes measures related to employee capabilities, technology infrastructure, and organizational culture
- The learning and growth perspective helps ensure that the organization is investing in its people and capabilities to support continuous improvement and innovation
Objectives of employee development
- Enhance employee skills and knowledge through training and development programs
- Improve employee engagement and motivation through recognition, rewards, and opportunities for growth
- Align employee goals and incentives with the organization's strategy and values
- Foster a culture of continuous learning, collaboration, and innovation
Metrics for innovation and improvement
- Employee training hours or investment in employee development
- Employee engagement or satisfaction index
- Percentage of employees with advanced degrees or certifications
- Number of employee suggestions or ideas implemented
- Technology infrastructure uptime or reliability
Implementing balanced scorecard
- Implementing a balanced scorecard requires a systematic approach that involves defining strategic objectives, selecting appropriate measures, setting targets, and communicating the scorecard throughout the organization
- It also requires ongoing monitoring, reporting, and adjusting of the scorecard based on changing business conditions and organizational priorities
- Successful implementation of the balanced scorecard depends on leadership commitment, employee engagement, and a culture of accountability and continuous improvement
Balanced scorecard vs traditional metrics
- The balanced scorecard differs from traditional performance measurement systems in several key ways:
- It includes both financial and non-financial measures
- It focuses on leading indicators of future performance, not just lagging indicators of past results
- It is aligned with the organization's strategy and helps communicate that strategy to all employees
- It emphasizes the linkages and trade-offs between different objectives and measures
Balanced scorecard for strategy execution
- The balanced scorecard is not just a measurement system, but also a tool for executing strategy
- It helps translate the organization's vision and strategy into a set of linked objectives and measures that can be communicated and monitored throughout the organization
- By aligning individual and departmental goals with the overall strategy, the balanced scorecard helps ensure that everyone is working towards the same objectives and that resources are allocated effectively
Cascading scorecards through organization
- To be effective, the balanced scorecard needs to be cascaded down through the organization, with each level and department developing its own scorecard that is aligned with the higher-level objectives and measures
- Cascading scorecards helps ensure that everyone in the organization understands how their work contributes to the overall strategy and that they are held accountable for their performance
- It also enables two-way communication and feedback, with lower-level scorecards informing and influencing higher-level objectives and measures
Benefits of balanced scorecard
- The balanced scorecard provides a number of benefits to organizations that adopt it, including:
- A more comprehensive and balanced view of performance that considers both financial and non-financial measures
- Better alignment of strategy and operations, with clear linkages between objectives, measures, and initiatives
- Improved communication and transparency, with a common language and framework for discussing performance
- Enhanced decision making, with data-driven insights into key drivers of success and areas for improvement
Balanced view of performance
- By considering multiple perspectives and measures, the balanced scorecard helps provide a more complete and balanced view of organizational performance
- It helps prevent a narrow focus on short-term financial results at the expense of long-term sustainability and growth
- It also helps identify potential trade-offs and conflicts between different objectives and measures, enabling more informed decision making
Alignment of strategy and operations
- The balanced scorecard helps align strategy and operations by translating high-level objectives into specific measures and initiatives that can be implemented and monitored at all levels of the organization
- It helps ensure that everyone is working towards the same goals and that resources are allocated in a way that supports the overall strategy
- It also helps identify gaps or inconsistencies between strategy and operations, enabling course corrections and adjustments as needed
Enhanced decision making
- The balanced scorecard provides a data-driven framework for decision making, with clear measures and targets for each objective
- It helps identify key drivers of performance and areas for improvement, enabling more targeted and effective interventions
- It also helps facilitate cross-functional collaboration and decision making, with a common language and framework for discussing performance and priorities
Challenges with balanced scorecard
- While the balanced scorecard offers many benefits, it also presents some challenges that organizations need to be aware of and manage, including:
- Identifying the right measures and targets that are meaningful, reliable, and actionable
- Adapting the scorecard to changing business conditions and organizational priorities
- Overcoming and ensuring buy-in and engagement from all stakeholders
Identifying right metrics
- One of the biggest challenges with the balanced scorecard is identifying the right measures and targets for each objective
- Measures need to be specific, measurable, achievable, relevant, and time-bound (SMART), and aligned with the organization's strategy and capabilities
- Targets need to be ambitious but realistic, and based on benchmarks, historical data, or stakeholder expectations
- Organizations need to strike a balance between leading and lagging indicators, as well as between short-term and long-term measures
Adapting to changing environment
- Another challenge with the balanced scorecard is adapting it to changing business conditions and organizational priorities
- As the external environment evolves and new opportunities or threats emerge, the scorecard may need to be updated or adjusted to reflect new strategic objectives or measures
- This requires ongoing monitoring, analysis, and communication, as well as a willingness to challenge assumptions and make tough trade-offs
Overcoming resistance to change
- Implementing a balanced scorecard often requires significant changes to an organization's culture, processes, and systems, which can meet with resistance from employees, managers, or other stakeholders
- Overcoming this resistance requires strong leadership, clear communication, and active engagement and participation from all levels of the organization
- It also requires ongoing training, support, and recognition to help people understand and embrace the new approach, and to reinforce the desired behaviors and outcomes
Key Terms to Review (22)
Balanced Scorecard: The Balanced Scorecard is a strategic management tool that provides a framework for measuring an organization's performance through multiple perspectives, including financial, customer, internal processes, and learning and growth. This approach connects various performance metrics to the organization's strategic goals, ensuring that innovation efforts align with overall business objectives.
Customer perspective: The customer perspective focuses on understanding customer needs, preferences, and experiences to drive business strategies and performance. It emphasizes the importance of customer satisfaction and loyalty as key indicators of an organization's success, linking customer insights to strategic goals and outcomes.
Customer satisfaction: Customer satisfaction is the measure of how well a company's products or services meet or exceed the expectations of its customers. It plays a crucial role in business success, as high levels of customer satisfaction can lead to repeat business, customer loyalty, and positive word-of-mouth recommendations. Understanding and improving customer satisfaction is essential for companies to thrive in competitive markets.
Data availability: Data availability refers to the accessibility and reliability of data when it is needed for decision-making, analysis, or reporting. It ensures that the right data is available at the right time to support strategic initiatives and performance management, which is essential for effective organizational operations.
David P. Norton: David P. Norton is a renowned management consultant and co-creator of the Balanced Scorecard, a strategic planning and management tool used to align business activities to the vision and strategy of the organization. His work focuses on transforming traditional management systems by integrating performance measurement with strategic management, enabling organizations to achieve their long-term goals.
Enhanced organizational performance: Enhanced organizational performance refers to improvements in an organization's overall effectiveness, efficiency, and productivity, resulting in better outcomes for stakeholders. This concept encompasses various dimensions, including financial results, customer satisfaction, internal processes, and learning and growth, often assessed through frameworks that provide a balanced view of performance across these areas.
Financial perspective: The financial perspective refers to an approach that emphasizes the importance of financial performance and metrics in evaluating an organization's success and strategic positioning. It focuses on key indicators such as revenue growth, profitability, return on investment, and cost management, highlighting how these financial metrics align with the overall strategic goals of an organization.
Improved decision making: Improved decision making refers to the process of enhancing the quality and effectiveness of choices made within an organization. This involves utilizing various tools and frameworks that help leaders evaluate options, understand performance metrics, and align their strategies with organizational goals, ultimately resulting in better outcomes.
Internal business processes: Internal business processes are the activities and operations that a company conducts to deliver its products and services efficiently and effectively. These processes are crucial for maximizing operational efficiency, ensuring quality, and enhancing customer satisfaction, ultimately impacting a company's performance and profitability.
Key Performance Indicators (KPIs): Key Performance Indicators (KPIs) are measurable values that demonstrate how effectively an organization is achieving its key business objectives. They help in assessing the success of a company or a particular activity in which it engages. KPIs provide essential data that supports decision-making and strategic planning, allowing leaders to gauge progress over time and adjust strategies accordingly.
Learning and growth: Learning and growth refers to the capacity of an organization to foster a culture of continuous improvement, innovation, and employee development. This aspect emphasizes the importance of investing in human capital and creating an environment where knowledge sharing, training, and skill enhancement are prioritized. By focusing on learning and growth, organizations can better adapt to changes in the marketplace and improve overall performance.
Non-Profit Balanced Scorecard: The non-profit balanced scorecard is a strategic planning and management tool that helps non-profit organizations measure their performance across multiple perspectives beyond just financial metrics. This framework incorporates key indicators in areas such as customer satisfaction, internal processes, and organizational learning to assess how well the organization achieves its mission and objectives. By using this tool, non-profits can align their operations with strategic goals and improve overall effectiveness in serving their communities.
Performance dashboards: Performance dashboards are visual tools that consolidate and display key performance indicators (KPIs) and important metrics in a single view, helping organizations monitor and analyze their performance against strategic goals. They facilitate real-time data tracking and decision-making by providing insights into various aspects of an organization’s operations, such as financial performance, customer satisfaction, and operational efficiency. By connecting data from different sources, performance dashboards enable stakeholders to quickly assess organizational health and make informed decisions.
Performance management: Performance management is a continuous process of setting objectives, assessing progress, and providing ongoing coaching and feedback to ensure that individual and organizational goals are met. It aligns employees' performance with the organization's strategic objectives, enhancing efficiency and accountability. This process incorporates various tools and metrics, including evaluation frameworks like the balanced scorecard, to measure success across different dimensions of an organization.
Resistance to change: Resistance to change refers to the behaviors and attitudes exhibited by individuals or groups when faced with modifications in their environment, particularly in organizational contexts. This phenomenon can arise from fear of the unknown, loss of control, or perceived negative impacts on personal and professional interests. It can significantly influence the effectiveness of strategies aimed at implementing new initiatives or innovations.
Return on Investment (ROI): Return on Investment (ROI) is a financial metric used to evaluate the profitability or efficiency of an investment, calculated by dividing the net profit of the investment by its initial cost. Understanding ROI is essential for decision-making across various domains, including assessing different types of innovations, managing a portfolio of projects, and determining the potential impact of exponential technologies. A clear picture of ROI helps in securing venture capital, leveraging crowdsourcing effectively, utilizing the balanced scorecard approach, and measuring portfolio management metrics to ensure long-term success.
Robert S. Kaplan: Robert S. Kaplan is a prominent American academic and consultant known for his contributions to management accounting and strategic management, particularly through the development of the Balanced Scorecard framework. This framework revolutionized how organizations measure performance by integrating financial and non-financial metrics, aligning business activities to the vision and strategy of the organization, and enhancing internal and external communications.
Six Sigma: Six Sigma is a data-driven methodology used to improve processes by eliminating defects and reducing variability. It focuses on achieving near perfection in operational performance, which translates into higher quality products and services. The approach uses statistical tools and techniques to identify root causes of problems and implement solutions that lead to significant improvements in efficiency and effectiveness.
Strategic Alignment: Strategic alignment refers to the process of ensuring that an organization's activities, resources, and goals are in sync with its overall strategy. This concept is crucial for maximizing performance, as it creates coherence between various departments and initiatives, ensuring that they work towards a common objective. Effective strategic alignment helps in prioritizing projects, allocating resources efficiently, and measuring success accurately.
Strategy mapping: Strategy mapping is a visual representation of an organization’s strategy, showing the relationships between strategic objectives across different perspectives. This tool helps organizations to clarify their goals, align resources, and track progress toward achieving those objectives. By providing a clear framework, strategy mapping connects financial goals with operational activities and fosters communication among stakeholders.
Sustainability Balanced Scorecard: The Sustainability Balanced Scorecard is a strategic planning and management tool that incorporates environmental, social, and governance (ESG) metrics alongside traditional financial performance indicators. By providing a framework that aligns business objectives with sustainability goals, it helps organizations track their progress in achieving sustainable growth while ensuring long-term value creation.
Total Quality Management: Total Quality Management (TQM) is a management approach focused on long-term success through customer satisfaction and continuous improvement. It involves all members of an organization in improving processes, products, services, and the culture in which they work. TQM emphasizes the importance of data-driven decision-making, aligning organizational objectives with customer needs, and fostering a culture of teamwork.