Definition
The Balanced Scorecard is a performance measurement framework that provides a balanced view of an organization’s performance by considering financial and non-financial metrics. It focuses on four perspectives: Financial, Customer, Internal Process, and Learning and Growth. This term is used to align business activities with the vision and strategy of the organization, improve internal and external communications, and monitor an organization’s performance against strategic goals.
Key Takeaways
- The Balanced Scorecard is a strategic planning and management system used extensively in business and industry, government, and nonprofit organizations to align business activities to the vision and strategy of the organization.
- Balanced Scorecard provides a framework that not only provides performance measurements, but also helps planners identify what should be done and how measurements align with the organizations’ strategy. It measures performance from four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth.
- Perspective of Balanced Scorecard imparts a balance between short term and long term objectives, between financial measures and non-financial measures, between lagging indicators and leading indicators and between external and internal performance perspectives. It helps an organization view the organization from these different perspectives simultaneously.
Importance
The Balanced Scorecard is an important finance term because it provides a comprehensive framework to translate a company’s strategic objectives into a set of performance measures.
It doesn’t just measure financial health, but equally considers other facets like customer relations, internal business processes, and learning and growth capabilities.
This multi-dimensional approach offers profound insights into the whole business spectrum, enabling organizations to gauge their performance in a holistic manner.
Apart from allowing firms to track financial results while monitoring progress in building capabilities and acquiring intangible assets required for future growth, the tool also aids in striking an optimal balance among conflicting demands of business stakeholders, thus assisting in maintaining business sustainability.
Explanation
The Balanced Scorecard, a strategic management system, is used primarily to align business activities to the vision and strategy of the organization. Its purpose is to enhance internal and external communications, and monitor organizational performance against strategic goals.
By looking beyond traditional metrics such as financial performance, the Balanced Scorecard provides a more ‘balanced’ view of an organization’s performance, hence the name. In essence, it measures a company’s performance from multiple perspectives, such as financial, customer, internal process, and learning and growth perspective.
From a financial perspective, it analyzes factors like return on investment, economic value added, and financial stability. From a customer perspective, it measures customer satisfaction and retention rates.
The internal processes perspective examines the efficiency of business processes, and finally, the learning and growth perspective focuses on employee satisfaction, retention and corporate culture. The Balanced Scorecard is a comprehensive tool that allows managers to get a broad view of the company and helps them to decide on directions for strategic development.
Examples of Balanced Scorecard
Apple Inc: Apple Inc. uses a Balanced Scorecard approach to align its business operations with its vision and strategy. For financial performance, Apple focuses on profitability and revenue growth. For customer perspective, Apple ensures high-quality products, excellent customer service, and innovation. Internal processes encompass product design and development, manufacturing, and distribution. Finally, for learning and growth aspects, Apple emphasizes employee creativity and skill development.
The Royal Bank of Scotland (RBS): RBS has utilized the Balanced Scorecard methodology to evaluate its performance from four perspectives: financial, customer, internal business processes, and learning and growth. For the financial perspective, they concentrate on financial indicators like revenue, profit, and losses. The customer perspective evaluates customer satisfaction levels, while internal business processes focus on operations, risk management, and product development. The learning and growth perspective focuses on staff training, development, and retention.
IBM : IBM has successfully implemented the Balanced Scorecard technique to align strategies and evaluate performance. For financial perspective, IBM pays attention to generating increased shareholder value and cost reduction. In terms of customer perspective, they aim for customer satisfaction, retention, and market share in targeted segments. For internal processes, they emphasize productivity, product leadership and operational excellence. Under learning and growth, IBM highlights employee satisfaction, retention and skills improvement.
FAQs on Balanced Scorecard
What is a Balanced Scorecard?
The Balanced Scorecard is a strategic planning and management system that organizations use to: communicate what they are trying to accomplish, align the day-to-day work that everyone is doing with strategy, and prioritise projects, products, and services.
What are the components of a Balanced Scorecard?
The Balanced Scorecard has four perspectives: Financial perspective, Customer perspective, Business process perspective, and Learning and growth perspective. These perspectives provide relevant feedback as to how well the strategic plan is executed.
What is the purpose of a Balanced Scorecard?
The purpose of a Balanced Scorecard is to give a holistic view of an organization’s overall performance. It is a strategic planning tool that includes objectives, measures, targets, and initiatives for all aspects of the business.
How does a Balanced Scorecard work?
A Balanced Scorecard works by measuring key performance indicators (KPIs) across four perspectives mentioned above. The KPIs are used to provide a model for implementing strategies and measuring performance against them.
Who uses a Balanced Scorecard?
The Balanced Scorecard is used by businesses, government agencies, and non-profit organizations all over the world. They use it to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals.
Related Entrepreneurship Terms
- Key Performance Indicators (KPIs)
- Strategic Management
- Performance Metrics
- Benchmarking
- Operational Efficiency
