The balanced scorecard translates the organization's strategy
The balanced scorecard translates the organization's strategy into four
perspectives, with a balance between the following:
between internal and external measures
between objective measures and subjective measures
between performance results and the drivers of future results
Beyond the Financial Perspective
In the industrial age, most of the assets of a firm were in property, plant, and
equipment, and the financial accounting system performed an adequate job of
valuing those assets. In the information age, much of the value of the firm is
embedded in innovative processes, customer relationships, and human resources.
The financial accounting system is not so good at valuing such assets.
The Balanced Scorecard goes beyond standard financial measures to include the
following additional perspectives: the customer perspective, the internal process
perspective, and the learning and growth perspective.
Financial perspective includes measures such as operating income, return
on capital employed, and economic value added.
Customer perspective includes measures such as customer satisfaction,
customer retention, and market share in target segments.
Business process perspective includes measures such as cost,
throughput, and quality. These are for business processes such as
procurement, production, and order fulfillment.
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Learning & growth perspective includes measures such as employee
satisfaction, employee retention, skill sets, etc.
These four realms are not simply a collection of independent perspectives. Rather,
there is a logical connection between them learning and growth lead to better
business processes, which in turn lead to increased value to the customer, which
finally leads to improved financial performance.
Objectives, Measures, Targets, and Initiatives
Each perspective of the Balanced Scorecard includes objectives, measures of those
objectives, target values of those measures, and initiatives, defined as follows:
Objectives major objectives to be achieved, for example, profitable growth.
Measures the observable parameters that will be used to measure progress
toward reaching the objective. For example, the objective of profitable growth
might be measured by growth in net margin.
Targets the specific target values for the measures, for example, +2%
growth in net margin.
Initiatives action programs to be initiated in order to meet the objective.
These can be organized for each perspective in a table as shown below.
Objectives Measures Targets Initiatives
Financial
Customer
Process
Learning
Balanced Scorecard as a Strategic Management System
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The Balanced Scorecard originally was conceived as an improved performance
measurement system. However, it soon became evident that it could be used as a
management system to implement strategy at all levels of the organization by
facilitating the following functions:
1. Clarifying strategy the translation of strategic objectives into quantifiable
measures clarifies the management team's understanding of the strategy and
helps to develop a coherent consensus.
2. Communicating strategic objectives the Balanced Scorecard can serve to
translate high level objectives into operational objectives and communicate the
strategy effectively throughout the organization.
3. Planning, setting targets, and aligning strategic initiatives ambitious but
achievable targets are set for each perspective and initiatives are developed
to align efforts to reach the targets.
4. Strategic feedback and learning executives receive feedback on whether
the strategy implementation is proceeding according to plan and on whether
the strategy itself is successful ("doubleloop learning").
These functions have made the Balanced Scorecard an effective management
system for the implementation of strategy. The Balanced Scorecard has been
applied successfully to private sector companies, nonprofit organizations, and
government agencies.
Recommended Reading
Robert S. Kaplan and David P. Norton, The Balanced Scorecard : Translating Strategy into Action
In The Balanced Scorecard, the original architects of the system introduce the framework assuming no
prior knowledge by the reader. Kaplan and Norton discuss the need for the Balanced Scorecard,
provide examples of metrics in the four perspectives, and explain how the system can be used to
implement and manage business strategy.
QuickMBA / Accounting / Balanced Scorecard
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