Balanced Scorecard – Definition, Importance and Advantages

Published by: Hitesh Bhasin

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The balanced scorecard is a strategic planning and management system used by organizations for communicating their strategic objectives or goals, aligning day-to-day tasks, prioritizing assignments, projects, services, or products, and measuring or monitoring progress towards strategic objectives.

The name “balanced scorecard” is associated with the idea of analyzing strategic measures alongside traditional financial measures to have a more “balanced” view of financial performance. A balanced scorecard is a strategic planning and management system that helps the business improve its business strategy and results. It allows the company to measure and monitor its progress in achieving the set strategic objectives.

What is a Balanced Scorecard (BSC)?

Definition: The Balanced Scorecard is defined as a business framework useful in managing and tracking the strategic objectives of an organization. Strategic objectives here can be understood as the actions businesses need to implement into their daily activities for improving their strategies.

Strategic objectives of the balanced scorecard are used for breaking down organizational abstract concepts such as mission and vision into key actionable steps. The working of the balanced scorecard is based upon the balancing between leading and lagging indicators that are respectively understood as the drivers and outcomes of your company goals.

The key indicators of your balanced scorecard are effective in telling you whether you will be able to accomplish your strategic goals or not. It will also suggest if you are moving ahead on the right track to accomplish your goals or not. By using a balanced scorecard, you will be able to-

  1. Describe your organization strategy map
  2. Measure the effectiveness of your organizational strategy
  3. Track and measure the actions in order to improve upon your results

Origin of Balanced Scorecard BSC

Art Schneiderman created the concept of a balanced scorecard as a strategic performance management system. The concept of a balanced scorecard was then modified and reintroduced by Dr. Robert Kaplan ( accounting academic) and Dr. David Norton (business executive and theorist).

In its 1992 article, The Harvard Business Review first published “The Balanced Scorecard—Measures That Drive Performance.” Dr. Robert Kaplan and Dr. David Norton both worked on a year-long project that incorporated around 12 top-performing companies.

Their study revolved around the previous performance measures that they adapted for including nonfinancial information. Companies in the United States, the United Kingdom, Japan, and Europe, first began using balanced scorecards in their companies.

Understanding Balanced Scorecards (BSCs)

A balanced scorecard is responsible for providing organizational management. It combines both past performances of the business and the present operational measures to develop strategies to improve the future financial arrangements of the business.

The concept of a balanced scorecard has developed into a reporting system that managers can use to evaluate their employees’ performance, using proven design methods and tools.

A balanced scorecard offers different perspectives to view a business. These are-

  1. Innovation and Learning perspective
  2. Financial perspective
  3. Customer perspective
  4. Internal business perspective

Importance of Balanced Scorecard

Importance of Balanced Scorecard

Some of the key reasons why BSCs are considered important for contemporary businesses and organizations are-

  1. A balanced scorecard ensures ethical behavior in the business. This helps in the growth and development of the company in the best possible way.
  2. Learning, business processes, finances, and customers are the areas that can be split up with the help of a balanced scorecard and can be analyzed and looked into in different ways.
  3. Primary business functions, such as achieving goals, growth, and development, coming up with desired outputs, can all be performed through the balanced scorecard method.
  4. Various factors of business performance can be identified with the help of this business model.

Who Uses the Balanced Scorecard (BSC)?

BSCs of Kaplan and Norton are prevalently used in a wide range of industries, businesses, governments, and nonprofit organizations. all around the world.

The balanced scorecard is used by more than half of the largest firms in Europe, the United States, and Asia. In Africa and the Middle East, this technique is also fairly widespread. According to a recent survey, a balanced scorecard ranked sixth among the top ten most often utilized management solutions worldwide.

The balanced scorecard is among the most significant business innovations of the previous 75 years. As a result, organizations can utilize BSC to track critical metrics and grow closer to the objectives they set out to attain in the first place.

Companies measured their talents and fitness by calculating how much money they were produced earlier in the day. However, tables have turned dramatically. While financial indicators are still required, they are only one part of the equation.

Companies will undoubtedly discover new and fascinating strategic initiatives with the assistance of the balanced scorecard method. These new measures, when paired with existing ones, will yield the desired effects.

As per a recent analysis by Bain & Co-

The balanced scorecard is positioned at the fifth position in its list of top ten most widely used management tools worldwide.

Balanced Scorecard BSC is also chosen by the editors of Harvard Business Review as one of the most influential business ideas in the last 75 years.

Breakdown Of The Balanced Scorecard Framework

While designing the Balanced Scorecard BSC framework, Kaplan and Norton thought that organizations have to first start with strategic objectives or goals that can be broken down into four distinct perspectives that are also interrelated-

  1. Financial goals refer to the goals that will impact an organization financially
  2. Customer goals refer to the things that are important to your customers and also impact your financial standing
  3. Process goals refer to the things that a business needs to do internally for meeting customer goals and ensuring customer satisfaction
  4. People (or learning and growth) goals refer to the skills and culture required by an organization for making customers happy and channelizing financial growth

These elements of Balanced Scorecard breakdown are also understood as the perspectives or characteristics of the BSCs. Let us dive deeper into the perspectives right away-

Characteristics of Balanced Scorecard BSC

Financial Data

Different characteristics or perspectives of the balanced scorecard revolve around the financial, customer, internal process, learning, and growth. Let us delve into these here and now-

1. Financial Data

This perspective is all about the money flow in the business, the satisfaction of the shareholders. The financial outlook of the balanced scorecard ensures effective financial management of the company.

2. Customer Perspectives

This perspective focuses on the satisfaction of the customers. It analyses the products and services that are provided to your customers and if they meet the customer’s expectations or not.

3. Internal Processes

With the help of this perspective, the business can function smoothly. Workflow and workforce systems become efficient, and an overall holistic approach is implemented.

4. Learning and Growth

This perspective helps a business to keep up with the latest trends and changes in the business environment. It ensures that the company has enough training functions to improve learning.

What is Balanced Scorecard Strategy Map?

One of the key elements in the BSC framework that is developed over time is the use of strategy maps.

The balanced scorecard strategy mapping is used for visualizing and communicating how value is created by the organization.

It can also be understood as a one-page visual depiction of the scorecard of an organization with the ability to show the connection among all four perspectives of BSCs in a one-page visual map.

As a simple graphic, the strategy map shows a logical as well as the cause-and-effect connection in between strategic objectives of an organization.

What is Cascading in a Balanced Scorecard?

Cascading a BSC refers to the process of translating the Tier 1 corporate-wide scorecard into Tier 2 first business units along with support units or departments and finally Tier 3 teams or individuals.

It is important for a strategy-focussed organization.

The Advantages of a Balanced Scorecard Approach

Advantages of a Balanced Scorecard

The following are some of the primary advantages of using a balanced scorecard:

1. Ease of use—better evaluation

Strategic planning is a management tool that allows those at the top to get a rapid and thorough company overview. It’s a performance measure for identifying and improving different internal company operations and the external results that flow from them.

The scorecard details the effects of the firm’s previous financial actions. Aside from that, a company’s current measures, such as its expansion activities or customer loyalty, are assessed. These operating metrics are what determine an organization‘s financial situation.

2. Checking on the competition with exclusive reports

Numerous firms have already embraced the performance measurement system after seeing how it improves a company’s success. It tends to fulfill managers’ functions and responsibilities. The scorecard comes with confidential reports on the cost and differentiation advantages and disadvantages. It contains the following items:

  • Improving the standard
  • Increasing teamwork
  • Developing a customer-centric mindset
  • Response time is being shortened.
  • Reducing the time it takes to launch a new product
  • Long-term operation

3. Obtaining objectives – Check for sub-optimization

While evaluating a firm’s productivity, the scorecard ensures that one factor does not outweigh the others. The performance measurement allows top managers to look at all of the major functional activities at once, enabling them to see if one area has improved at a price. It’s never been easier to achieve your goals.

Growth of Balanced Scorecard

The top companies in leading countries like the USA, Asia, and Europe have opted to use and implement the balanced scorecard.

This has led countries such as Africa and other middle-eastern countries to do the same. A balanced scorecard has been considered one of the most influential and thriving business ideas.

With the help of balanced scorecards, companies can combine traditional and modern business ideas to get the desired results. Financial and commercial success can be achieved with this strategic measure that is being accepted worldwide.

Conclusion!

A balanced scorecard improves a business’s performance and internal business processes. This results in better results. You might consider it as a performance metric useful in identifying, improving, and controlling different functions and associated outcomes of a business.

Originally it was developed for for-profit companies but later it was adapted for use by government and non-profits agencies. It measures four main aspects of a business that are business processes, customers, finance, and learning & growth.

How effective do you consider Balanced Scorecard BSC in helping businesses in tracking and improving their performances?

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Article by:

Hitesh Bhasin

Hitesh Bhasin is the CEO of Digiaide and his vision is to make business knowledge accessible to everyone.