2. Introduction
The Balanced Scorecard, referred to as the BSC, is a framework to implement
and manage strategy. . It balances financial measures with performance
measures and objectives related to all other parts of the organisation. It is
a business performance management tool. It was originally published by
Dr Robert Kaplan and Dr David Norton as a paper in 1992. And then
formally as a book in 1996. Both the paper and the book led to its
widespread success. BSC is not just a scorecard, it is a methodology. It
starts by identifying a small number of financial and non-financial
objectives related to strategic priorities. It then looks at measures, setting
targets for the measures and finally strategic projects (often called
initiatives). It is in this latter stage where the approach differs from other
strategic methodologies. It forces an organisation to think about how
objectives can be measured and only then identifies projects to drive the
objectives. This avoids creating costly projects that have no impact on the
strategy.
3. • The ‘balance’ is brought about by a focus on financial and non-
financial objectives that are attributed to four areas of an
organisation. These are the Perspectives. They are: Financial,
Customer, Internal Processes and Organisational Capacity.
• In brief, the four scorecard perspectives are:
• The Balanced Scorecard Links Performance Measures
• How do we look to shareholders? (financial perspective)
• How do customers see us? (customer perspective)
• What must we excel at? (internal perspective)
• Can we continue to improve and create value? (innovation and
learning
• perspective)
4. Financial perspective
Financial perspective
The Balanced Scorecard retains the financial perspective since financial measures are
valuable in summarizing the readily measurable economic consequences. Financial
performance measures indicate whether a company's strategy implementation
and execution are contributing to bottom-line improvement. Financial objectives
basically relate to profitability measured, e.g. by operating income, Return on
capital employed and economic value added, Alternative financial objectives can
be rapid sales growth or generation of cash flow. n addition to increasing returns,
most organisations are concerned with the risk of these returns. Therefore, when
it is strategically important, this organisation will want to incorporate explicit
risk management objectives into their financial perspective. Thus, all objectives
and measures in the other scorecard perspectives should be linked to achieving
one or more objectives in the financial perspective.The high-level financial
objectives and financial measures of the organisation that help answer the
question – How do we look to our shareholders? Financial objectives are usually
the easiest to define and measure. However, creating a financial objective, for
example, Improve Profit, rarely provides a clue as to how to achieve the objective.
by linking objectives from the lower levels in the model, we begin to see exactly
where to define projects and make investments
5. Customer
• These perspective aims at identifying the customer and market segments in which
the business units will choose to compete. The managers should then determine
the best measures of the business unit's performance for these targets. In this
perspective, managers must first determine core measures that will describe the
successful outcomes of a well formulated and implemented strategy. These core
measures include customer satisfaction, retention, new customer acquisition,
customer profitability an market and account share in each specific segment.
However, these measures present some of the disadvantage of the financial
measures. It reflects post performance and the equivalent of driving by looking in
the rear view mirror of car. Objectives and measures that are directly related to
the organisation’s customers, focusing on customer satisfaction. To answer the
question: How do our customers see us? How a company is performing from its
customers’ perspective has become, therefore, a priority for top management. The
balanced scorecard demands that managers translate their general mission
statement on customer service into specific measures that reflect the factors that
really matter to customers. Customers’ concerns tend to fall into four categories:
time, quality, performance and service, and cost. It is always important to take a
step outside and view THE company or organisation from customers view point.
company need to understand what they want from you, , what it can do for them.
6. Internal Processes
In this perspective, the managers must identify the internal processes that are
crucial to their organisations. Those crucial processes are also the ones that should
help then deliver superior value to their customer and achieve financial target.
This perspective is another example of the superiority of the Balance Scorecard
upon traditional performance measures. The Balanced Scorecard go beyond the
simple assessment of existing processes, it will usually identify new processes that
the organisation should implement in order to be successful. In this perspective,
Balanced Scorecard should not only consider operations processes but also
innovation processes. By incorporating innovation processes measured, the
Balanced Scorecard provides a manager with a set of a tool that does not only
reflect the short-term, but also give in insight of about the long-term. Customer-
based measures are important, but they must be translated into measures of what
the company must do internally to meet its customers’ expectations. After all,
excellent customer performance derives from processes, decisions, and actions
occurring throughout an organization. Managers need to focus on those critical
internal operations that enable them to satisfy customer needs. Some of the
biggest cost items can be reduced by streamlining internal processes. This is also
the best area to focus on new and creative ideas
7. Learning and Growth Perspective -
This perspective works at the ability of employees, the quality of information
systems and the effects of organisational alignment in supporting
accomplishment of organisational goal. Internal business processes will
only succeed if adequately skilled and motivated employees, supplied with
accurate and timely information, are driving them.
Finally, through the learning and growth perspective, managers identify the
organisational infrastructure that would best fit strategic goals. While in
the other three perspectives, the managers identify where the
organisation stands now and where it has to be in the future in order to be
successful, this fourth perspective really tells them about how to get
there. The learning and the growth perspective have three dimensions,
people, system and organisation perspectives. With financial, customer
and internal perspective, mangers were able to identify the gaps between
existing organisational resources and the ones required being
successful. The only way to close gaps is for the organisational to judicial
invest in employees and information technology and to design the most
appropriate organisational structures that could support their strategy.
8. Advantages of balanced scorecard
1. Periodic Reporting of Status of Strategic Goals -
Balanced scorecard forms the key part of management system and therefore is
discussed periodically. This helps keeping everyone in the organisation aligned and
achieve growth through balanced Scorecard.
2. Employees Identify Themselves with Goals -
Employees working to achieve the goals identified in the balanced Scorecard can
clearly identify themselves with how they are helping the organisation to achieve
its growth. It is very important that employees are explained the balanced
Scorecard at each possible opportunity to help them understand the way their
achievements are paving path for the organisation's future. Employees then feel
proud to be involved in the efforts they put-in on day-to-day basis. This further
helps employees getting aligned to company's vision and mission.
3. Communicates Strategy to the Organisation -
Balanced Scorecard clearly defines the steps the organisation would take to achieve its
goals through well thought of strategy. The working of the strategy, setting
priorities in line with various internal and external constraints helps the lender-
ship appreciate the chosen strategy and its need
9. Advantages of balanced scorecard
contd…..
4. Consensus on the Strategy at Executive Level -
Building a balanced scorecard requires brain storming at board / higher level where discussion
are held on organisations vision and its core values. This helps in every one getting aligned
about these basics and helps executives look for growth strategies clearly. Balanced
Scorecard discussions sets the priorities for the organisation and senior executives can
visualize the future more clearly.
5. Translates Strategy into Meaningful Goals -
Building a balanced Scorecard requires determination of specific goals and targets. The
organisation now has a clear vision of what is to be done to achieve its goals. With the
priorities and the game plan clearly defined, every one now focuses on achieving the goals.
6. Processes Focus to Achieve Strategic Goals -
Having established a balanced Scorecard forces various process owners to modify the key
processes of the organisation to achieve identified goals. Since these processes directly affect
the organisation's performance, they are likely to be the key processes. With
focus concentrated on processes, the organisation meets the customer's expectations more
efficiently and helps to make the organisation more competitive.
10. Disadvantages of Balanced Scorecard
1. Lacks Direct Links between Financial and Non-Financial Segments -
The balanced Scorecard lacks direct, explicit links between financial and non-financial segments and
hence, relegate the non-financial segments to the back of the bus', whenever there is a conflict
with the financial segments.
2. Distracts from Achieving Actual Goals -
Balanced scorecard can add a new type of reporting without necessarily improving quality or financial
numbers, so, it seems to be an additional set of non-value-added reporting or, worse, a distraction
from achieving actual goals.
3. A Scorecard and not Decision-Making Tool -
Since it is a scorecard, it cannot be used as a tool though it can help in assessing performance.
4. Performance is Subjective -
Balanced Scorecard performance is subjective. Unlike quality levels, it cannot be quantified except by
surveys or management opinion. Mandating a specific number of training hours per year to meet
an "learn and innovate" doesn't necessarily mean all employees take courses that help them in
their jobs or that attending classes to fill in the quota is better than working on the assembly line.
Demanding high employee morale can hurt managers, since morale is not always a manager's
purview
11. Advantages of balanced scorecard
contd…..
5. Ignores Bottom-Up Perspective -
Scorecards are a top-down focus for the business. It avoids the bottom up perspective.
6. Leads to Lack of Focus -
Focusing on scoreboards can lead to a lack of focus on the underlying actions that
produce a good score.
7. Does not Give Timely Information -
It provide legging metrics that do not produce timely information.
8. High Initial Cost -
Implementing a balanced scorecard system can cost a lot of money in training time
and additional money for any consultants that are needed during the process.
9. Leads to Reluctance to Change -
It can lead to reluctance to change within the organisation.
10. Produces Measures from Diversified Divisions -
It produces measures from diversified divisions that cannot be aggregated at the
coporate level
