What is Balanced Scorecard?

Introduction
This paper provides a detailed account of and guidance to building Balanced Scorecard. It is intended to serve as a one-stop guide that answers every question that you may have about this important Strategic Management approach. The paper starts with describing the method and discusses in detail its various components with the help of diagram. It then, provides a practical guide to build a balanced scorecard using a seven step model. Examples are used where necessary to help explain the method. Links to further material and sources of information on this topic are also provided to help you learn more about Balanced Scorecard. After reading this paper, you should be able to apply the concepts and use the balanced scorecard method to analyse any organisation.

Balanced Scorecard is a concept that measures a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. This new approach to strategic management was developed in the early 1990s by Dr Robert Kaplan (Harvard Business School) and Dr David Norton. A Balanced Scorecard enables organisations to clarify their vision and strategy, and translate them into action (Cobbold and Lawrie, 2002).

All professionals have their own methods of communication. Accountants do this with financial statements, engineers with building drawings and architects using physical models. For a long time, however, the strategic planners faced the dilemma of a way to communicate and convey the finished product – "the strategic plan" – to the end users. The traditional ways of presenting strategic plans, despite their nice covers, bar charts, well-written reports and professional layouts, have not been able to impact the people responsible for their execution. This resulted in poor execution of the strategic plan throughout the entire organisation. This situation is further compounded by the fact that, in most organisations, the strategic plan is normally devised by the upper management while the execution takes place at the lower level and is steered by the executives at tactical level (Kurtzman, 1997).

According to the Balanced Scorecard Collaborative (BSC, 2007), there are four reasons (Kaplan and Norton, 1992) for the failure of the strategic plan:

  • Few executives understand the strategies of the organisation below upper level management.
  • The objectives of most people are not linked to the strategy of the organisation
  • The organisational resources (e.g. time, energy and money) are often not allocated to those things that are critical to the organisation. Budgets, for example, are not always linked to the strategy.
  • Little time is spent by the management on strategy and too much on the short-term tactical decision making.

According to the survey by the Balanced Scorecard Collaborative only 5% of the workforce understands their company strategy; the incentives of only 25% of managers are linked to the strategy; over 60% of organisations do not link budgets to strategy; and 86% of executives spend less than one hour per month discussing strategy (Kurtzman, 1997).

A new way of communicating strategy was therefore required and this is the background from where the Balanced Scorecard emerged. Using this technique, the strategy is expressed in terms of measurements and targets to which employees can relate. The strategy thus reaches everyone in a language that makes sense and thus leads to much better execution of strategy (Cobbold and Lawrie, 2002). Today the Balanced Scorecard method is widely used by the leading players of the industry including AT&T, Canon, BMW, Siemens, United States' Postal Service and Lloyds TSB. According to the CEO of BMW, John Christman:

"The Balanced Scorecard links our objectives, initiatives, and metrics to our strategy while communicating our priorities to every member of our company. Today our BSC programme includes linkages to our project approval process, budgeting methodology, compensation system, technology initiatives, training programmes, and even our community involvement and charitable contribution efforts. Our results have been excellent with an uninterrupted history of growth and a successful strategy implementation that continues today, consistent with the first plans established over six years ago. Profits are up, return on assets is up, and assets have grown each year." (BMW, 2007)

Main aspects of the Balanced Scorecard
There are four main components of a Balanced Scorecard (as shown in the figure). These are discussed below:

Figure 1

Financial Perspective: The importance of financial considerations is paramount in most situations and in most organisations. For any strategic choice, therefore, the timely and accurately presented funding data is critical and the sources of funding and budgeting must be done. Another key consideration is the prospects of sustainability of funding for the initiative required to implement the strategy. This component of the Balanced Scorecard therefore looks at the projects from a financial perspective and discusses financial considerations (Kaplan and Norton, 1992). 

Customer Perspective: This area focuses on what must be done and what's most important, from the customer's perspective, to achieve the mission. The importance of customer focus and customer satisfaction has gained considerable importance in recent management philosophy. The increased competition in the markets means that it is easier than ever for the dissatisfied customers to switch suppliers. The objectives, measures, targets and, eventually activities are therefore planned to implement strategy regarding the customer satisfaction (Olve et al., 1999).

Internal Process Perspective: This component focuses on what an organisation must be doing well to meet the customer needs defined in the Customer Perspective. It also lets managers know how well their business is running and how well the internal processes are designed to meet the objectives. These may be divided into: a) mission-oriented processes and b) support processes. Specific measures and benchmarks are then set to monitor their effectiveness (Kaplan and Norton, 1992).

Learning & Growth Perspective: This perspective focuses on how an organisation is improving its ability to innovate, improve and learn in order to support success with the critical operations and processes defined in the Internal Process Perspective. This may include employee training and corporate culture attitudes. In the modern management philosophy, it is increasingly becoming important for the organisations to develop a culture of learning where the employees constantly learn and share the knowledge to facilitate growth. The on-the-job training and mentoring is also an essential component of the perspective.

Each of these four perspectives (Kaplan and Norton, 1996), has a set of objectives, measures, targets and initiatives to achieve strategic goals defined. These are discussed as follows:

Objectives: Within each perspective, objectives identify what needs to be done in order to achieve the overall mission. They answer the questions:

  • What must we do (from each perspective) to achieve the overall mission?
  • What is most important (from each perspective) to achieving the overall mission?

Measures: Measures provide a way to determine how an organisation is doing in achieving the objectives within the perspectives, and in turn the overall mission (Hubbard, 2007). They are the most "actionable" component in the Scorecard. Measures help answer the question:

  • How do we know how well we're doing in achieving our objectives, and in turn our overall mission?

Targets: Targets are set for each measure to monitor and evaluate the progress towards the objective (Hubbard, 2007).

Initiatives: These are the set of activities that are planned within each perspective in order to achieve the targets set for each measure.

Together, these four perspectives and the four components of each perspective make a grid that forms the Balanced Scorecard. In the next section, a seven-step model to build a Balanced Scorecard is discussed (Kaplan and Norton, 1996).

Building a Balanced Scorecard
The process of building a Balanced Scorecard can be divided into seven steps (Niven, 2006) that can be categorised into three phases:

Phase 1: The Strategic Foundation
Step 1: The organisation must be aligned around a clear and concise strategy. The strategy is what feeds the Balanced Scorecard. Therefore a strategic plan needs to be constructed at this stage. This includes the identification of the specific objectives that tell people what to do and a set of targets to convey what is expected. For example, a strategic objective may be to decrease the delivery times by 15% over the next six months through more localised distribution centres. This step is at the heart of Balanced Scorecards as the whole organisation needs to be aligned and rallied around strategic objectives and targets set at this stage. A communication plan is also outlined to convey these to stakeholders. This may include the communication of the plan to shareholders through a press conference, administrative staff through meetings and distributors through personal contact etc. (Niven, 2006).

Step 2: The major strategic areas on which the organisation must focus are then determined. It is important to restrict the organisation to select areas of key importance for strategic success otherwise it can find itself doing too many things. Most organisations' strategic focus is on the stakeholder groups such as customers, shareholders, and employees. Most public limited companies, for example will have "shareholder value" as a major strategic area. The strategic areas should be linked to the strategic goals defined in step 1. For example the strategic goal of having the most innovative product line of hand-held computers by the year 2008 means that the strategic area for the organisation to focus upon is "product innovation" (Olve et al., 1999).

Step 3: A strategic grid is built for each major strategic area of the business. Having devised the strategy in step 1 and identified the strategic areas in step 2, these are now translated into a set of grids. As described earlier, Balanced Scorecards are structured over four perspectives: Financial, Customer, Internal Processes, and Learning and Growth. Strategic grids include these four layers. Within each layer, the strategic objectives are placed, making sure everything links back. Trying to develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard (Kaplan and Norton, 1996).


Phase 2: Three Critical Components
Step 4: Measurements are established for each strategic objective in the areas identified (Hubbard, 2007). The measurement criteria provide the targets which can then be used to measure the level of success in achieving them. For each strategic objective on the strategic grid, at least one measurement is required. If there are several measurements for a strategic objective, then chances are that there is more than one strategic objective. Is it possible to have an objective without a measurement? Yes, it is possible, but not having a measurement makes it difficult to manage the objective. It's best to revisit this objective and ask the question: Why is this an objective? Measurement makes it easy to quantify the strategic objectives, asking the question: How well are we doing? (Niven, 2006).

Step 5: Targets are set for each measurement. Measurement alone is not good enough. We must drive behavioural changes within the organisation if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organisation in meeting its strategic objectives. For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on the number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established. Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. The strategic goals can also provide clues as to what the targets should be (Hubbard, 2007).

Step 6: At this step, formal programmes, activities, initiatives or projects are designed and launched to achieve the targets set for each area. The final design step is to close the loop and put specific programmes in place to make everything happen. This is perhaps the trickiest part in the entire process. How does the organisation actually hit these targets and meet its strategic objectives? What major initiatives must the organisation undertake to make all of this happen? Programmes are the major projects that facilitate execution of everything downstream within the Scorecard. Some typical examples of programmes include quality improvement programmes, marketing initiatives, enterprise resource planning, customer relations management and supply chain management. These programmes usually have certain characteristics such as:

  • Sponsorship by upper level management.
  • Utilisation of designated leaders and cross-functional teams
  • Presence of deliverables, milestones and a timeline
  • Requiring resources (people, facilities, allocated budget, etc.) (Niven, 2006).

Phase 3: Development
Step 7: The entire process of building a Balanced Scorecard is repeated in other parts of the organisation to construct a single coherent management system. This integrates all parts of the organisation and allows successful execution of the strategy (ibid.).

Further Information
The books and the journal articles of Robert Kaplan and David Norton (1992 – 1996) must be the starting point to learning and understanding the Balanced Scorecard. These can be easily accessed via Athens login facility and using library. Many other authors such as Kurtzman (1997), Cobbold and Lawire (2002), Niven (2006) and Hubbard (2007) have also extensively worked on Balanced Scorecards. The Balanced Scorecard Institute, represented in 16 countries, also provides training and consultancy in using this method and holds extensive knowledge and expertise in this regard. Many key text books used in the universities, especially in management science courses, also explain and provide guidelines for building Balanced Scorecards.

If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, Pest Analysis, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.

References
BMW (2007) 'Strategic Management', BMW (www.bmw.com)

BSC (2007) 'Balanced Scorecard Reports', Balanced Scorecard Collaborative (www.bscol.com/education/bsr/reprints)

Cobbold, I and Lawrie, G. (2002) 'The Development of the Balanced Scorecard as a Strategic Management Tool', Performance Management Association.

Hubbard, D. (2007) 'How to Measure Anything: Finding the Value of Intangibles in Business', John Wily & Sons.

Kaplan, R. and Norton, D. (1992) 'The Balanced Scorecard: Measures that drive performance', Harvard Business Review, pp77–80.

Kaplan, R. and Norton, D. (1996) 'Balanced Scorecard: Translating Strategy into Action', Harvard School Press.

Kurtzman, J. (1997) 'Is Your Company off course? Now you can find out why', Fortune (Feb), pp128–130.

Niven, P. (2006) 'Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results', John Wiley & Sons.

Olve, N., Roy, J. and Wetter, M. (1999) 'Performance Drivers: A Practical Guide to Using the Balanced Scorecard’, John Wiley & Sons.

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