History
The Balanced Scorecard was created to address the shortcomings of traditional financial measures such as profit and return on investment (ROI). These metrics were criticized for being too narrow and focused solely on short-term financial results. Furthermore, they did not provide a complete picture of an organization’s performance and did not reflect non-financial aspects of the business.
Definition
The Balanced Scorecard is a strategic management tool that translates an organization’s strategy into a set of performance measures that are aligned with the goals and objectives of the organization.
It gives a comprehensive picture of an organization’s performance by measuring it in four areas: finance, customers, internal processes, and learning and growth.
What does it express?
This metric expresses an organization’s strategy and performance in four areas:
• Financial Perspective: This viewpoint assesses an organization’s financial performance, including revenue, profits, and return on investment.
• Customer Perspective: This viewpoint assesses an organization’s performance from the standpoint of its customers, including customer satisfaction, customer retention, and market share.
• Internal Process Perspective: This perspective assesses an organization’s internal processes for delivering value to its customers, such as operational efficiency, quality, and innovation.
• Perspective on Learning and Growth: This perspective assesses an organization’s ability to learn and innovate, including employee training and development, research and development, and technology use.
Who is interested in the Balanced scorecard?
is typically of interest to senior executives, managers, organizational decision-makers and stakeholder. This is because the Balanced Scorecard is a strategic management tool that assists organizations in aligning their activities with their overall strategy and goals.
Senior Executives
Senior executives are frequently in charge of determining the organization’s strategic direction and ensuring that its goals and objectives are met. The Balanced Scorecard gives them a more complete picture of the organization’s performance, allowing them to identify areas for improvement and make strategic decisions that align with the organization’s goals.
Managers
Managers are also interested in the Balanced Scorecard because it helps them understand how their department or team contributes to the overall success of the organization.
They can identify areas for improvement and make data-driven decisions that help drive the organization forward by measuring performance in each of the four perspectives (financial, customer, internal process, and learning and growth).
Stakeholders
Stakeholders, such as employees, customers, and investors (f.ex Angel investors), may be interested in the Balanced Scorecard.
The Balanced Scorecard can help to build trust and confidence among stakeholders by providing a more balanced view of an organization’s performance and demonstrating the organization’s commitment to achieving its goals and objectives.
Balanced scorecard vs competitors
| Framework | Key features | Benefits | Limitations |
|---|---|---|---|
| Balanced Scorecard | Focuses on four key perspectives: financial, customer, internal processes, and learning and growth. | Helps organizations align their strategy with their goals, communicate strategy to stakeholders, and monitor performance. | Can be complex to implement and requires significant resources and commitment from leadership. May also focus too heavily on quantitative measures. |
| OKR | Objectives and Key Results (OKRs) are used to set goals and track progress. | Provides a simple and flexible way to track progress towards specific goals, encourages accountability and transparency. | May not provide a holistic view of organizational performance, as it is focused on achieving specific objectives. Can also lead to an emphasis on short-term goals over long-term strategy. |
| Six Sigma | Uses data-driven methodology to improve quality and reduce variability in business processes. | Provides a rigorous, data-driven approach to process improvement, which can lead to increased efficiency and quality. | May not be suitable for all organizations, and can be resource-intensive to implement. May also focus too heavily on process improvements rather than overall business performance. |
| Lean Management | Focuses on eliminating waste and increasing efficiency in business processes. | Provides a systematic approach to process improvement that can lead to reduced costs and increased efficiency. | Can be difficult to implement and may not be suitable for all organizations. May also focus too heavily on process improvements rather than overall business performance. |
Pros and Cons
Pros
• Gives a more complete picture of an organization’s performance.
• Ensures that an organization’s activities are in line with its overall strategy.
• Aids in identifying areas for improvement
• Facilitates communication and coordination throughout the organization.
Cons
• Implementation can be time-consuming and costly.
• Non-financial aspects of an organization’s performance can be difficult to quantify.
• If not implemented properly, it is vulnerable to manipulation or misinterpretation.
What could a Balanced Scorecard look like?
Some typicals measurements are:
1. Sales growth
Sales growth is the rate at which a company’s sales revenue increases over a given time period. Here’s an example of how it might look on a scorecard:
In this example, the “Sales Growth” measure is displayed in a box with a value of “12%” and a positive trend of “2%”.
2.Customer Satisfaction
Customer satisfaction measures how happy customers are with a company’s products or services. Here’s an example of how it might look on a scorecard:
In this example, the “Customer Satisfaction” measure is displayed in a box with a “83%” value and a “5%” negative trend.
3. Employee Turnover
Employee turnover is the rate at which employees leave a company and are replaced by new workers. Here’s an example of how it might look on a scorecard.
In this example, the “Employee Turnover” measure is displayed in a box with a value of “10%” and a neutral trend of “0%”
Key takeaways for the company:
1. Sales growth: Because the company’s sales growth trend is positive, it may continue to invest in marketing and sales initiatives in order to sustain and increase the sales growth rate.
The company may also evaluate the performance of the sales team and identify areas for improvement, such as providing additional sales training or support.
2. Customer satisfaction: Because customer satisfaction is declining, the company may investigate the reasons for the decline. This could include conducting customer surveys or gathering feedback in other ways, followed by action to address the underlying issues.
For example: The company may need to improve the quality of its products or services, or address issues with customer service that are causing dissatisfaction.
3. Employee turnover: Because the employee turnover trend is neutral, the company may not take immediate action in this area, but they will continue to closely monitor the situation. If the trend continues, the company may need to investigate the causes of the increase in employee turnover and take steps to address the underlying causes.
Balanced Scorecard Example
| Measure | Target | Actual | Trend | Comment |
|---|---|---|---|---|
| Sales Growth | 10% per year | 12% per year | Positive | Sales growth has been strong, exceeding our target. |
| Customer Satisfaction | 90% satisfaction rate | 85% satisfaction rate | Negative | Customer satisfaction has declined slightly, we need to investigate and take action to address any underlying issues. |
| Employee Turnover | 10% turnover rate | 10% turnover rate | Neutral | Employee turnover has remained stable, we will continue to monitor and take action if needed. |
How to create a Balanced Scorecard step by step
• Step 1: Define the mission and strategy of the organization. The first step in developing a Balanced Scorecard is to define the mission and strategy of the organization. Identifying the organization’s core values, mission statement, and strategic goals is part of this process.
The mission and strategy should be articulated clearly so that everyone in the organization understands them and can work to achieve them.
• Step 2: Determine key performance indicators (KPIs) for each viewpoint.
Following the definition of the organization’s mission and strategy, the next step is to identify the key performance indicators (KPIs) for each of the four perspectives (financial, customer, internal process, and learning and growth).
KPIs should be specific, measurable, and aligned with the strategic goals of the organization. To ensure that the KPIs are relevant and meaningful to everyone, stakeholders from all levels of the organization should be involved in this process.
• Step 3: Set goals for each KPI.
Following the identification of the KPIs, the next step is to set targets for each KPI. Targets should be challenging but attainable, and they should be aligned with the organization’s strategic goals.
Goal-setting allows you to monitor your progress and identify areas for improvement.
• Step 4: Collect and analyze data
The following step is to gather and analyze KPI data. This process includes tracking performance against targets, identifying trends and patterns, and identifying areas for improvement.
Data should be collected on a regular basis and shared with organizational stakeholders.
• Step 5: Make a scorecard or dashboard.
Following the collection and analysis of data, the next step is to create a dashboard or scorecard that visualizes KPIs and performance against targets.
The dashboard or scorecard should be simple to understand and provide a clear picture of the organization’s performance across all four dimensions.
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