What is the Balanced Scorecard?
Developed in the early 1990s by Drs. Robert Kaplan and David Norton, the Balanced Scorecard has become one of the most influential and widely adopted business performance management frameworks in the world. But what exactly is a Balanced Scorecard and how can firm’s apply it to improve strategy execution and results?
At its core, the Balanced Scorecard is a strategic planning and management system that aligns business activities with the firm’s vision and strategy while monitoring performance. It complements traditional financial metrics with operational and stakeholder perspectives to give managers a balanced, comprehensive view of organizational health and progress.
The Balanced Scorecard framework organizes objectives, initiatives and measures into four perspectives:
Financial - Tracking typical financial indicators like revenues, costs, margins and asset utilization provides insight on how well the strategy is contributing to the bottom line.
Customer - Performance drivers related to customers and markets focus on creating value and differentiation from the customer perspective. Common measures include satisfaction, retention, market share, acquisition and account profitability.
Internal Process - Critical operational processes at which the organization must excel to meet customer and financial objectives are monitored through measures like quality, cycle times, productivity and cost control.
Learning and Growth - The capabilities required to enable internal process excellence and customer value form the learning and growth perspective. Typical measures include employee satisfaction, information systems performance, and human capital development.
The power of the Balanced Scorecard lies in the linkages and cause-and-effect relationships between performance across perspectives. For example, faster process cycle times and enhanced employee capabilities can improve customer satisfaction, which drives market share gains and ultimately financial returns. This fosters synergy between functions and focus on the drivers of strategic success.
To implement a Balanced Scorecard, organizations typically follow four key steps:
Clarify vision and strategy - The scorecard starts with the end in mind by clarifying what the organization ultimately wants to achieve.
Build the scorecard - Executives select a balanced set of financial and non-financial measures reflecting the organization's strategic objectives and success factors.
Align operations - Daily operations and individual goals are aligned with the scorecard measures to enhance focus.
Review and update - The Balanced Scorecard is reviewed regularly and updated to accommodate changes in the internal and external environment.
The Balanced Scorecard has evolved from a performance measurement system to a core management framework used by leading organizations worldwide. It enables communicating strategy up and down the organization, aligning capabilities and resources to key priorities, reviewing progress in a systematic way, and enhancing feedback and learning. For these reasons, the Balanced Scorecard remains integral for organizations seeking to execute strategy and boost overall performance.
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