The Balanced Scorecard – A Strategic Management Tool [By Josephine Tam]

Executives and managers have long recognised the limitation of solely relying on financial data as the basis for decision-making and as a performance measurement system. As the economy and industrial landscape continues to change, this short term and singular perspective of performance measurement could give misleading signals on the organisation’s long term growth, hindering its continuous improvement and innovation.

In the late 20th century, intangible assets became more prominent, but it also introduced a different level of challenges as to how to manage and value an intangible asset. Undoubtedly, intangible assets can create value for organisations, but they seldom have value attached by themselves. For instance, what do your customers want from your company? The answer could be measures such as value-for-money products and services, shorter lead time, or an enjoyable customer journey. Next, what are the key processes in your company? It is of paramount importance to be able to identify the key processes within the supply chain that an organisation must excel in, and its internal core competencies with considerations of measures such as process cycle time, machine down time and productivity. Many of these connected internal processes are critical to create value for these intangible assets, which subsequently transform into product and services that have a tangible value attached to it.

As intangible assets have gained popularity, senior executives have started realising that no single measure can provide a clear performance target or a focus on critical areas of the business. Senior executives now want a balanced exhibition of both financial and operational performance measures.

According to Robert S. Kaplan and David P. Norton (2001), the Balanced Scorecard concept could reflect the changing nature of technology and competitive advantages. In an industrial age economy that is dominated by tangible assets, financial measures such as Returns on Investment (RoI) or Returns on Asset (RoA) generated through these tangible assets can be easily measured and derived from an organisation’s Balance Sheet and Profit and Loss statements.

The Concept of Balanced Scorecard

The concept of Balanced Scorecard (BSC) was first introduced by Kaplan and Norton in 1992, to supplement traditional financial performance measures with additional emphasis on the Customer, Internal Processes, and Learning and Growth pillars. Since its inception, it has been widely adopted by commercial companies, not-for-profit organisations and government agencies.

Unlike traditional financial performance measures which only report on historical events, this scorecard is an innovative tool which aims to allow senior executives review the performance of an organisation in a single management report from different critical perspectives namely, Financial, Internal Business Process, Customer, Learning and Growth.

The scorecard approach allows senior executives to communicate the organisation’s strategies by linking them to departmental and individual objectives. Conventionally, companies evaluate a department’s performance based on their financial performance and individual incentives are tied to the achievement of short term financial goals. The BSC allows managers to communicate to all levels the organisation’s long term strategy and how it will align with the department and individual objectives.

balanced-scorecard

The Balanced Scorecard Four Perspectives (Kaplan & Norton, 1996)

Transformation of Vision and Strategy to Balanced Scorecard

An organisation’s vision statement is often broad in nature to outline its purpose for its existence, a statement of its philosophy and values. A vision statement provides directions to the business and it acts as a framework for decision making, while serving as a guiding principle to senior executives in making sound and economically decisions. While there are many advantages of a vision statement, we should be mindful –that a vision statement can be vague and lack substance, which subsequently can lead to individual interpretations that could hinder the growth of the organisation. For instance, a vision statement “to be the number one in providing excellent customer service”, at a glance, works fine. Upon further analysis, what it really mean to become the “number one”? What is the definition of “excellent customer service”?

The BSC approach brings senior executives back to their drawing boards to rethink and provide clarity to the organisation’s vision statement before arriving at a common consensus to translate its vision into meaningful terms for people to follow. The objective of having a BSC is to guide, control and challenge the entire organisation in realising a shared conception of the future. A vision is expressed as a number of more specific objectives. Measures and targets are established and the organisation can put in place action plans to meet the set targets. As part of the process, it is important to communicate and align employees to the agreed strategy on how to achieve the overall organisation’s vision, setting realistic goals and linking individual performances to rewards system.

Balanced Scorecard: Four Perspectives

Financial Perspective

Financial performance measures indicate whether an organisation’s corporate strategies have successfully been implemented and its execution has contributed to a positive bottom line improvement. For instance, Company A’s vision is to provide renewable energy at a competitive and affordable prices to everyone. Fundamentally, for any profit-seeking organisations, their aim is increase shareholder value. Shareholder value is essentially the enterprise value excluding debts and liabilities. This value can be increased through increase of cash flow by revenue growth and reduction of expenses, or better management of an organisation’s cost of capital.

In addition, Company A also stated its financial objectives which is simply to have a better cash flow management, capital allocation for maximum returns and maximise project profitability. Given the nature of Company A’s business activity, most of its projects are large scale and long in duration. Thus, the management team of Company A are particularly concerned about capital allocation and interest coverage, so they have devised a number of metrics to measure this together with cash flow management metrics.

Customer Perspective

The Customer Perspective defines how an organisation distinguishes itself from its industry peers to attract and acquire new targeted customers, retain and deepen its relationship with them. In today’s business environment, many organisations have their corporate vision statement or value that focuses on customers. In another word, the customer value proposition is critical to a business’ success.

Company A recognised that they have two distinct group of customers: a group that focuses on government projects that are motivated by high value added relationships. As a result, Company A conducts a biannual Customer Satisfaction Survey to solicit customers’ perceptions towards Company A’s service level and performance rating. In order to satisfy the needs of this group of customers on technological advancement and product innovation, Company A has incorporated another metric to measure economically feasible new products and/or technology launches in a year.

On the other hand, the other customer group deals with commercial projects for e.g. MNCs or private institutions. This group of customers are driven by price, as they are highly price sensitive and looking for best value for money. Company A acknowledged this by providing value for money products and services that are measured by cost savings in their utilities bill.

Internal Business Perspective

Through evaluation from the Customer Perspective, a more externally geared performance measure, organisations should now look internally to understand its internal business processes, to realise what the organisations must excel at in order to achieve both Financial and Customer objectives. Internal business processes are crucial to allow an organisation to deliver the expectations of customers and satisfy shareholders’ expectations of high financial earnings.

As established earlier, internally connected processes are critical as these will create value for intangible assets, which then transform into tangible values of a product or service. In order to create impactful customer satisfaction, senior executives should first identify the organisation’s core competencies and key processes within the whole value chain, then formulate internal measures around key business processes that have a direct and indirect influence on customers’ satisfaction.

In Company A, the management team acknowledged that success of the organisation largely dependent on its closely knit relationship with its stakeholders. They have therefore decided to work closely with their stakeholders who play an important role in project execution:

  1. Company A’s customers – to ensure precise project specifications and timelines are obtained
  2. Company A’s suppliers – to ensure quality products and shorter lead time
  3. Company A’s investors (financial institutions) – to ensure sufficient cash flow is allocated to project execution

As project management is the heart and soul of Company A’s main business activity, Company A have formulated relevant measures for project management and procurement process.

Innovation and Learning Perspective

In order to keep ahead of competition, organisations need to make a continuous effort in improving their current products and/or services, to surpass their competitors or innovate and develop a new product or service with expanded features or capabilities.

As the last quadrant in the BSC is Learning and Growth, Company A makes continuous improvements to operational processes by challenging the status quo. Company A improved on current internal processes that made it more efficient, that ultimately increased values to shareholders and customers. In consideration of technological advancement, as customers in general are getting more sophisticated, keeping up with customers’ needs and requirements have become a key focus of the senior executive of Company A.

As a result, the management team in Company A have developed key metrics to measures product innovation and operational excellence for Company A.

Adoption of Balanced Scorecard and Moving Forward

Over time, the BSC grew from a performance measurement system to a performance management system. Through the early adoption of performance measurement systems, organisations achieved tangible yet narrow results. However, in recent years, organisations are using the BSC to clarify and communicate strategy to all employees within the organisation, to align individual departments or business units and individual goals with the overall organisation strategy and linking them to reward systems. Organisations also uses the BSC to string strategic objectives to long term target and annual budgets.

In summary, a BSC should be tailored for each part of the organisation to allow for each part to contribute in a holistic way to meet corporate objectives. It is a framework that manages strategy implementation and provides the flexibility for strategy to evolve in response to changes in this highly competitive market and a fast pace technological advancement environment.

 

References

Chavan, M. (2009), “The balanced scorecard: a new challenge”. Journal of Management Development, Vol.28, No.5, pp. 339-406.

Kaplan, R. S. and Norton, D. P. (1993), “Putting the Balanced Scorecard to work”. Harvard Business Review, September – October, pp. 4-17.

Kaplan, R. S. and Norton, D. P. (1996), “Using the Balanced Scorecard as a strategic management system”. Harvard Business Review, January – February, pp. 37-47.

Kaplan, R. S. and Norton, D. P. (2000), “Having trouble with your strategy? Then map it”. Harvard Business Review, September – October, pp. 51-60.

Kaplan, R. S. and Norton, D. P. (2001), “Transforming the Balanced Scorecard from performance measurement to strategic management: part 1”. American Accounting Association, Vol.15, No.1, pp. 87-102.

Kaplan, R. S. and Norton, D. P. (2005), “The Balanced Scorecard: measure that drive performance”. Harvard Business Review, July – August, pp. 1-11.

Lawrie, G. and Cobbold, I. (2002), “Evolution of the Balanced Scorecard into an effective strategic performance management tool”. 2GC Publication, pp. 1-16.

Mseden, N. A. A. and Nassar, M. A. (2015), “The effect of Balanced Scorecard (BSC) implementation on the financial performance of the Jordanian companies”. International Business and Social Science Research Conference, pp. 1-20.

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