The Balanced ScorecardTraditional financial performance metrics provide
The Balanced Scorecard
Traditional financial performance metrics provide information about a firm's past
results, but are not wellsuited for predicting future performance or for
implementing and controlling the firm's strategic plan. By analyzing perspectives
other than the financial one, managers can better translate the organization's
strategy into actionable objectives and better measure how well the strategic plan is
executing.
The Balanced Scorecard is a management system that maps an organization's
strategic objectives into performance metrics in four perspectives: financial,
internal processes, customers, and learning and growth. These perspectives provide
relevant feedback as to how well the strategic plan is executing so that adjustments
can be made as necessary. The Balance Scorecard framework can be depicted as
follows:
The Balanced Scorecard Framework
Financial
Performance
Objectives
Measures
Targets
Initiatives
Customers
Objectives
Measures
Strategy
Internal
Processes
Objectives
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Targets
Initiatives
Measures
Targets
Initiatives
Learning
& Growth
Objectives
Measures
Targets
Initiatives
The Balanced Scorecard (BSC) was published in 1992 by Robert Kaplan and David
Norton. In addition to measuring current performance in financial terms, the
Balanced Scorecard evaluates the firm's efforts for future improvement using
process, customer, and learning and growth metrics. The term "scorecard" signifies
quantified performance measures and "balanced" signifies that the system is
balanced between:
shortterm objectives and longterm objectives
financial measures and nonfinancial measures
lagging indicators and leading indicators
internal performance and external performance perspectives
Financial Measures Are Insufficient
While financial accounting is suited to the tracking of physical assets such as
manufacturing equipment and inventory, it is less capable of providing useful
reports in environments with a large intangible asset base. As intangible assets
constitute an everincreasing proportion of a company's market value, there is an
increase in the need for measures that better report such assets as loyal customers,
proprietary processes, and highlyskilled staff.
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al measures are needed for such intangibles. Scorecard Measures are Limited in Number The Balanced Scorecard is more than a collection of measures used to identify problems. It is a system that integrates a firm's strategy with a purposely limit
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ult in hundreds of measures and would create information overload. To avoid this problem, the Balanced Scorecard focuses on four major areas of performance and a limited number of metrics within those areas. The objectives within the four perspectives are carefully selected and are firm specific. To avoid information overload, the total number of measures should be limited to somewhere between 15 and 20, or three to four measures for each of the four perspectives. These measures are selected as the ones deemed to be critical in achieving breakthrough competitive performance; they essentially define what is meant by "performance". A Chain of CauseandEffect Relationships Before the Balanced Scorecard, some companies already used a collection of both financial and nonfinancial measures of critical performance indicators. However, a welldesigned Balanced Scorecard is different from such a system in that the four BSC perspectives form a chain of causeandeffect relationships. For example, learning and growth lead to better business processes that result in higher customer loyalty and thus a higher return on capital employed (ROCE). Effectively, the causeandeffect relationships illustrate the hypothesis behind the organization's strategy. The measures reflect a chain of performance drivers that determine the effectiveness of the strategy implementation. Objectives, Measures, Targets, and Initiatives Within each of the Balanced Scorecard financial, customer, internal process, and learning perspectives, the firm must define the following: Strategic objectives what the strategy is to achieve in that perspective.
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Measures how progress for that particular objective will be measured.
Targets the target value sought for each measure.
Initiatives what will be done to facilitate the reaching of the target.
The following sections provide examples of some objectives and measures for the
four perspectives.
Financial Perspective
The financial perspective addresses the question of how shareholders view the firm
and which financial goals are desired from the shareholder's perspective. The
specific goals depend on the company's stage in the business life cycle.
For example:
Growth stage goal is growth, such as revenue growth rate
Sustain stage goal is profitability, such ROE, ROCE, and EVA
Harvest stage goal is cash flow and reduction in capital requirements
The following table outlines some examples of financial metrics:
Objective Specific Measure
Growth Revenue growth
Profitability Return on equity
Cost leadership Unit cost
Customer Perspective
The customer perspective addresses the question of how the firm is viewed by its
customers and how well the firm is serving its targeted customers in order to meet
the financial objectives. Generally, customers view the firm in terms of time,
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quality, performance, and cost. Most customer objectives fall into one of those four
categories. The following table outlines some examples of specific customer
objectives and measures:
Objective Specific Measure
New products % of sales from new products
Responsive supply Ontime delivery
To be preferred supplier Share of key accounts
Customer partnerships Number of cooperative efforts
Internal Process Perspective
Internal business process objectives address the question of which processes are
most critical for satisfying customers and shareholders. These are the processes in
which the firm must concentrate its efforts to excel. The following table outlines
some examples of process objectives and measures:
Objective Specific Measure
Manufacturing excellence Cycle time, yield
Increase design productivity Engineering efficiency
Reduce product launch delays Actual launch date vs. plan
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Learning and Growth Perspective
Learning and growth metrics address the question of how the firm must learn,
improve, and innovate in order to meet its objectives. Much of this perspective is
employeecentered. The following table outlines some examples of learning and
growth measures:
Objective Specific Measure
Manufacturing learning Time to new process maturity
Product focus % of products representing 80% of sales
Time to market Time compared to that of competitors
Achieving Strategic Alignment throughout the Organization
Whereas strategy is articulated in terms meaningful to top management, to be
implemented it must be translated into objectives and measures that are actionable
at lower levels in the organization. The Balanced Scorecard can be cascaded to
make the translation of strategy possible.
While top level objectives may be expressed in terms of growth and profitability,
these goals get translated into more concrete terms as they progress down the
organization and each manager at the next lower level develops objectives and
measures that support the next higher level. For example, increased profitability
might get translated into lower unit cost, which then gets translated into better
calibration of the equipment by the workers on the shop floor. Ultimately,
achievement of scorecard objectives would be rewarded by the employee
compensation system. The Balanced Scorecard can be cascaded in this manner to
align the strategy thoughout the organization.
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The Process of Building a Balanced Scorecard
While there are many ways to develop a Balanced Scorecard, Kaplan and Norton
defined a fourstep process that has been used across a wide range of
organizations.
1. Define the measurement architecture When a company initially
introduces the Balanced Scorecard, it is more manageable to apply it on the
strategic business unit level rather than the corporate level. However,
interactions must be considered in order to avoid optimizing the results of one
business unit at the expense of others.
2. Specify strategic objectives The top three or four objectives for each
perspective are agreed upon. Potential measures are identified for each
objective.
3. Choose strategic measures Measures that are closely related to the actual
performance drivers are selected for evaluating the progress made toward
achieving the objectives.
4. Develop the implementation plan Target values are assigned to the
measures. An information system is developed to link the top level metrics to
lowerlevel operational measures. The scorecard is integrated into the
management system.
Balanced Scorecard Benefits
Some of the benefits of the Balanced Scorecard system include:
Translation of strategy into measurable parameters.
Communication of the strategy to everybody in the firm.
Alignment of individual goals with the firm's strategic objectives the BSC
recognizes that the selected measures influence the behavior of employees.
Feedback of implementation results to the strategic planning process.
Since its beginnings as a peformance measurement system, the Balanced Scorecard
has evolved into a strategy implementation system that not only measures
performance but also describes, communicates, and aligns the strategy throughout
the organization.
Potential Pitfalls
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The following are potential pitfalls that should be avoided when implementing the
Balanced Scorecard:
Lack of a welldefined strategy: The Balanced Scorecard relies on a well-
defined strategy and an understanding of the linkages between strategic
objectives and the metrics. Without this foundation, the implementation of the
Balanced Scorecard is unlikely to be successful.
Using only lagging measures: Many managers believe that they will reap the
benefits of the Balanced Scorecard by using a wide range of nonfinancial
measures. However, care should be taken to identify not only lagging
measures that describe past performance, but also leading measures that can
be used to plan for future performance.
Use of generic metrics: It usually is not sufficient simply to adopt the metrics
used by other successful firms. Each firm should put forth the effort to
identify the measures that are appropriate for its own strategy and
competitive position.