14 September, 2022

Key Business Concepts 101: The Balanced Scorecard

By: Lotfi Al-Sarori

Vector Created by: Vectorjuice | Freepik
The Balanced Scorecard is a very popular strategic management framework, and it will be the subject of this article of our Key Business Concepts 101 series. The Balanced Scorecard (BSC) is a management tool that has grown in prominence since its introduction by Kaplan and Norton in a 1992 article in the Harvard Business Review.

The BSC can be used to create, carry out, keep tabs on, and modify corporate strategies and plans. As a strategic management tool, the BSC aligns a company's everyday actions with its long-term goals. The ability to monitor and quantify performance is another benefit. Financial, customer, process, and learning and growth are the four main pillars around which the company's strategic initiatives are built. The purpose of this effort is to develop a streamlined and simplified dashboard that provides a comprehensive view of the company's performance from these four perspectives.

BSC ensures that everyone in the firm is aware of what's going on in their own area of influence. Executive management can obtain a rapid snapshot of how the company is performing as a whole, and each level of management can see how their own division is faring. One key strength of the BSC is the ability to track both financial and non-financial metrics. 

How does it work?

The BSC can be put into action right away, providing a comprehensive picture of the firm from four key perspectives:
  • Financial Perspective: It's important to know how well the company is performing financially.
  • Customer Perspective: How is the organization viewed by its customers?
  • Internal Perspective: To achieve our goals, what must we do on a day-to-day basis?
  • Innovation and Learning Perspective: In order to achieve our objectives, it is important that we constantly develop ourselves.
The idea is to utilize basic KPIs and to use the appropriate ones for each area. A few essential KPIs, rather than many, are simpler to update and analyse by relevant management because of their smaller size.

Lead and Lag Indicators

Lag indicators show metrics of what has already happened. Lead indicators, on the other hand, can help businesses anticipate future events even if current "lag" indicators show something different. A poor level of customer satisfaction, for instance, is a lead indicator that can have a negative impact on financial performance even though the most recent financial data (lag indicators) indicate otherwise favourable results.

To provide a complete picture of the business's performance, the BSC has to incorporate both lagging and leading indicators.

A Closer Look

Financial, Customer, Internal Process, and Learning and Growth are the four components that make up a balanced scorecard in their most basic form. Each perspective has a set of objectives. Objectives should then have measures (key performance indicators - KPIs), targets, and Initiatives. Initiatives are the things that need to be done to reach the goal(s) of the particular “perspective”.

For example, if the objective is to increase customer satisfaction, you need to specify how you will measure that such as a survey, and what the target you are aiming to achieve (e.g., a certain percentage). After that, you list all the initiatives that you would take to achieve the specified objective. That is, the work that needs to be done to achieve it.

Key Business Concepts 101: The Balanced Scorecard

The Financial Perspective

It is the job of the Financial Perspective to keep tabs on the company's financial health. This perspective keeps a check on monetarily relevant metrics including funding, cost, revenues, ROI, and profitability.

The Customer Perspective

All data pertaining to customers are kept in the Customer Perspective. Indicators in this field are often leading indicators since they project future performance based on current metrics.

Internal Business Process

The activities that must be performed within an organization to achieve set goals fall under the purview. Processes like product development and administration fall under this category. This perspective incorporates indicators like quality, service delivery, and operational efficiency.

Learning & Growth

Innovation is a responsibility of the Learning and Growth Perspective. This section addresses the question of what changes the company could do to better its standing in the market, boost its public profile, and bring it closer to its stated objectives. Additionally, the success of training programs may be monitored here.

The Strategy Map

The BSC was improved in 2000 with the introduction of the strategy map. Kaplan and Norton's definition of a strategy map is a "visual picture of the strategy." It provides a concise explanation of how the objectives of the four BSC views come together to define the strategy on just one page.
Adopted from: Balanced Scorecard Institute

This was just a brief rundown of the BSC and its applications. The trend has been around for over 30 years and shows no signs of slowing down. Using the BSC is not limited to strategic management and performance monitoring. It may be adjusted to add or change its main perspective to meet a broad range of applications. Companies have used it to manage quality assurance, sustainability initiatives, and IT operations. Because of its popularity and versatility, it is an essential tool that every organization should consider employing to run a more efficient and productive business.

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