Updated July 3, 2023
What is a Balanced Scorecard?
A Balanced Scorecard is a tool that helps managers understand how the company is performing in areas like finance, customer satisfaction, internal processes, and growth.
It is like a report card that evaluates if the company is able to achieve its set goals. The scorecard looks at different business areas, like how happy customers are, how well the company’s processes are working, and how much the company is growing and learning. The main goal of the scorecard is to help the company improve its internal operations to provide better outcomes for customers and the company as a whole.
4 Perspectives of the Balanced Scorecard
The Balanced Scorecard provides four perspectives, each providing unique insights into the various organizational aspects. These four perspectives are:
1. Financial Perspective: This perspective measures the financial elements of the organization, such as revenue, profit margin, return on investment (ROI), etc. These aspects denote the financial health of any given organization.
2. Customer Perspective: This perspective focuses on whether an organization meets customer expectations. Aspects such as satisfaction, loyalty, and retention of customers are taken care of here.
3. Internal Business Process Perspective: This perspective measures the organization’s performance in executing its strategies and achieving its objectives. Some of its examples include quality, productivity, innovation, and employee engagement.
4. Learning and Growth Perspective: This perspective measures how well an organization develops its capabilities to create future value, such as its culture, skill development, information technology, and knowledge management.
Examples of Balanced Scorecard
Here are two examples of companies that have successfully used the balanced scorecard approach to achieve their business goals:
1. Coca-Cola
| Situation | In the early 2000s, Coca-Cola faced increased competition and declining sales. |
| Solution | Implement a balanced scorecard focusing on four key areas: financial performance, customer satisfaction, internal processes, and learning and growth. |
| Metrics Tracked | Market share, customer loyalty, employee engagement, and other relevant performance indicators. |
| Outcomes | Identified areas for improvement and made strategic changes that helped Coca-Cola regain its position as a leader in the beverage industry. |
| Benefits: | Improved financial performance, increased customer satisfaction, optimize internal processes, and enhanced learning and growth opportunities. |
2. Southwest Airlines
| Situation | Competitive industry |
| Solution | Used a balanced scorecard approach to measure and manage performance. |
| Metrics Tracked | On-time performance, customer service, employee turnover, financial performance. |
| Outcomes | Made data-driven decisions that have helped the company sustain its standing. |
Characteristics of Balance Scorecard
A balanced scorecard has the following several key characteristics:
1. Clear Objectives
Clear objectives on a balanced scorecard should be specific, measurable, achievable, relevant, and time-bound. This helps with easy understanding and communication across the organization, from top-level management to front-line employees. They also help organizations to focus on what matters most and measure their progress toward achieving their goals.
Example:
A company that manufactures and sells outdoor gear might have the following objectives on its balanced scorecard:
- Increase sales by 10% in the next fiscal year (specific)
- Track such sales revenue by product line and sales region (measurable).
This would help all the employees to align their resources and activities towards achieving the desired goal efficiently.
2. Communication and Alignment
A balanced scorecard promotes communication and teamwork across the organization. By sharing performance data and progress toward goals, everyone can observe how their work contributes to the organization’s success. This helps people feel more engaged and motivated to achieve the organization’s objectives more efficiently.
Example:
A software company can share performance data and progress toward its goal of releasing a new product within six months. By doing so, all team members can understand how their role contributes to the product launch’s success. This can increase motivation and engagement and align individual efforts with the organization’s strategic objectives, leading to a successful product launch.
3. Performance Measures
A balanced scorecard uses specific measures to track progress toward each objective. These measures are based on data rather than opinions or perceptions and can be financial, like revenue and profitability, or non-financial, like customer satisfaction, employee engagement, and process efficiency.
Example:
A hotel chain can track the success of its customer service initiatives using performance measures like positive customer reviews, percentage of complaints resolved within a timeframe, and average time to resolve complaints. Tracking these measures enables the chain to improve customer service, leading to increased loyalty and revenue.
4. Cascading Goals
Cascading goals is the process of aligning individual goals and objectives with the organization’s overall strategic objectives. In a balanced scorecard, cascading goals begin at the highest level of the organization and flow down to each department, team, and an individual employee.
Example:
Company ABC’s strategic objective is to increase revenue by 20% in the next fiscal year. To achieve this objective, the company has set specific goals and objectives for each department, as shown in the table below:
|
Department |
Specific Objective |
| Sales | Increase sales revenue by 10% through a new product launch |
| Marketing | Increase brand awareness by 15% through targeted social media campaigns |
| Production | Reduce costs by 15% through process improvements |
| Customer Service | Increase customer satisfaction ratings by 25% through improved training |
By cascading goals, Company ABC can improve communication, coordination, and collaboration across the organization and improve its overall performance.
Who Uses a Balanced Scorecard?
A balanced scorecard is used by the following:
|
Purpose of Balanced Scorecard |
|
| Private sector businesses | Align organizational strategy with financial performance, customer satisfaction, internal processes, and learning and growth objectives |
| Non-profit organizations | Track impact and measure the success of programs |
| Public sector/government agencies | Measure progress towards policy objectives, increase accountability and transparency |
| Individuals | Track and achieve personal goals |
Benefits of a Balanced Scorecard
A balanced scorecard has many benefits for businesses of all sizes and industries. Here are six key benefits of using a balanced scorecard:
1. Improved Performance
Using a balanced scorecard can benefit businesses by improving their performance. It helps them identify areas for improvement, set clear goals, and track their progress toward achieving them. By focusing their resources on the areas that matter most, businesses can make improvements that drive overall performance.
Example:
A marketing agency can use a balanced scorecard to identify weak areas, set targets to improve client satisfaction rates, and track progress against these goals. By doing so, the agency can make improvements that lead to better teamwork and coordination, ultimately resulting in improved overall performance.
2. Better Decision Making
By using a balanced scorecard, companies can make better decisions based on objective data rather than relying solely on intuition or incomplete information. This leads to more informed and effective decision-making, ultimately benefiting the organization.
Example:
Let’s say a company is trying to decide whether to invest in a new product line. By using a Balanced Scorecard, the company can create metrics to measure the potential success of the new product line, such as market demand, production costs, and expected profitability. With this information, the company can make an educated decision about whether to proceed with the investment or not.
3. Increased Accountability
Using a balanced scorecard creates a culture of accountability within the organization, as individuals and teams are held responsible for their performance in relation to specific goals and metrics. This can lead to improved performance and a greater sense of employee ownership and responsibility.
Example:
Let’s say a company sets a goal to improve its customer satisfaction ratings. By using a Balanced Scorecard, the company can create metrics to measure customer satisfaction. By tracking these metrics over time, the company can hold individuals and teams accountable for their performance in relation to the goal of improving customer satisfaction. Overall, this leads to improved holistic performance and a greater sense of accountability within the organization.
4. Alignment of Resources
By aligning its resources with its goals and metrics, a company can make use of a balanced scorecard and ensure that its efforts are focused on achieving the desired outcomes. This leads to better efficient use of resources and greater overall effectiveness in achieving organizational goals.
Example:
Let’s say a company has set a goal to increase its market share in a particular industry. The company can create metrics using a balanced scorecard to measure progress toward this goal. If the metrics indicate that customer acquisition is lagging behind, the company may choose to allocate more resources toward marketing and sales efforts to attract new customers. This way, organizations can improve their overall performance and achieve their goals more effectively.
Frequently Asked Questions (FAQs)
Q1. How do you create a balanced scorecard?
Answer: To create a balanced scorecard, an organization needs to identify its key performance indicators, align them with its vision and objectives, and establish targets for each metric.
Q2. Who is responsible for creating and implementing a balanced scorecard?
Answer: Creating and implementing a balanced scorecard is typically the responsibility of senior management, including the CEO, CFO, and other top-level executives. However, it is a collaborative effort that involves input and participation from employees at all levels of the organization.
Q3. What are the common mistakes to avoid when implementing a balanced scorecard?
Answer: The common mistakes to avoid when implementing a balanced scorecard include focusing too much on short-term performance, neglecting to involve key stakeholders in the development process, and failing to update the scorecard regularly to reflect changes in the organization’s strategy or goals.
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