Introduction
Balance score card is a tool for measuring whether the actual activities of the company meet the objectives set by the company in terms of vision and strategy.Balance score card was first used in Analog devices in 1987. The BSC is a performance measurement framework or tool, with similar principles as Management by Objectives, which was publicized by Robert S. Kaplan and David P. Norton in the early 1990s. Having realized the shortcomings of traditional management control systems, Kaplan and Norton designed the BSC as a result of a one year research project with 12 companies.
Traditional financial reporting systems provided an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction.
To deal with this problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not only financial measures, but also customer, business process, and learning measures.BSC is a strategic management system which incorporates all the quantitative and abstract measures that are of importance to the enterprise
The word balance is used to denote a balance between financial and nonfinancial indicators, between internal and external constituencies of the organization, and between leading and lagging indicators of success.
The Balanced Scorecard framework is depicted in the following diagram:
Financial
Customer
Strategy
Business
Processes
Learning
& Growth
Perspectives
The balanced scorecard divides the organization's strategy into four perspectives, with a balance between the following:
• between internal and external measures
• between objective measures and subjective measures
• between performance results and the drivers of future results
Traditionally in Industrial era the assets of the companies would be Property, Machinery equipments etc and as such financial accounting system performed an adequate job of valuing those assets. But in today’s knowledge driven or information era the assets of the company are its “people” which contribute to a company’s success in the form of customer relations, human resources. Valuing such a dynamic assets thru traditional systems is not possible.
The Balanced Scorecard goes beyond standard financial measures to include the following additional perspectives: the customer perspective, the internal process perspective, and the learning and growth perspective
• Financial perspective –
Which includes measures such as operating income, return on capital employed, and economic value added.
• Customer perspective –
Which includes measures such as customer satisfaction, customer retention, and market share in target segments.
• Business process perspective –
Which includes measures such as cost, throughput, and quality. These are for business processes such as procurement, production, and order fulfillment.
• Learning & growth perspective –
Which includes measures such as employee satisfaction, employee retention, skill sets, etc.
This four perspectives are not independent entities. Rather, there is a logical connection between them - learning and growth lead to better business processes, which in turn lead to increased customer satisfaction, which finally leads to improved financial performance.
Objectives, Measures, Targets, and Initiatives
Each perspective of the Balanced Scorecard includes objectives, measures of those objectives, target values of those measures, and initiatives, defined as follows:
• Objectives
Major objectives to be achieved, for example, profitable growth.
• Measures –
The observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin.
• Targets –
The specific target values for the measures, for example, +2% growth in net margin.
• Initiatives –
Action programs to be initiated in order to meet the objective.
These can be organized for each perspective in a table as shown below.
Objectives Measures Targets Initiatives
Financial
Customer
Process
Learning
Balanced Scorecard as a Strategic Management System
The Balanced Scorecard originally was conceived as an improved performance measurement system. However, it soon became evident that it could be used as a management system to implement strategy at all levels of the organization by facilitating the following functions:
1. Clarifying strategy –
the translation of strategic objectives into quantifiable measures clarifies the management team's understanding of the strategy and helps to develop a coherent consensus.
2. Communicating strategic objectives –
the Balanced Scorecard can serve to translate high level objectives into operational objectives and communicate the strategy effectively throughout the organization.
3. Planning, setting targets, and aligning strategic initiatives –
ambitious but achievable targets are set for each perspective and initiatives are developed to align efforts to reach the targets.
4. Strategic feedback and learning –
executives receive feedback on whether the strategy implementation is proceeding according to plan and on whether the strategy itself is successful
Balanced Scorecard and Measurement-Based Management
Balance score card is established on concepts like Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and primarily measurement-based management and feedback.
Double-Loop Feedback
In traditional industrial activity, "quality control" and "zero defects" were the watchwords. In order to shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. The problem with this approach is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects. The there are variations created at every step in a production process, and the causes of variation need to be identified and fixed. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, it is necessary that all business processes should be part of a system with feedback loops. The feedback data should be examined by managers to determine the causes of variation, what are the processes with significant problems, and then they can focus attention on fixing that subset of processes.
The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomes of business strategies. This creates a "double-loop feedback" process in the balanced scorecard.
Outcome Metrics
You can't improve what you can't measure. So metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics that managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis. Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.
So the value of metrics is in their ability to provide a factual basis for defining:
Strategic feedback to show the present status of the organization from many perspectives for decision makers
Diagnostic feedback into various processes to guide improvements on a continuous basis
Trends in performance over time as the metrics are tracked
Feedback around the measurement methods themselves, and which metrics should be tracked
Quantitative inputs to forecasting methods and models for decision support systems
Management by Fact
The goal of making measurements is to permit managers to see their company more clearly -- from many perspectives -- and hence to make wiser long-term decisions.
Fact based management can be "Modern businesses depend upon measurement and analysis of performance. Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect -- that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors' or with 'best practices' benchmarks.
Benefits from using the Balanced Scorecard
• Increased Creativity and Unexpected Ideas.
• The Balanced Scorecard helps align key performance measures with strategy at all levels of an organization.
• The Balanced Scorecard provides management with a comprehensive picture of business operations. The Balance Scorecard facilitates communication and understanding of business goals and strategies at all levels of an organization.
• Maximized Cooperation - Team members are focused on helping one another succeed.
• Usable Results - Transforms strategy into action and desired behaviours.
• The Balanced Scorecard concept provides strategic feedback and learning.
• A cross organizational team - More open channels of communications - Enthusiastic People.
• Initiatives are continually measured and evaluated against industry standards
• Unique Competitive Advantage
o Reduced Time-frames.
o Improved Decisions and Better Solutions.
o Improved Processes.
Building & Implementing a Balanced Scorecard
The components of the management system are shown in the figure above. Starting at “high altitude”, Mission, Vision, and Core Values are translated into desired Strategic Results. The organization’s “Pillars of Excellence”, or Strategic Themes, are selected to focus effort on the strategies that matter the most to success. Strategic Objectives are used to decompose strategy into actionable components that can be monitored using Performance Measures. Measures allow the organization to track results against targets, and to celebrate success and identify potential problems early enough to fix them. Finally, Strategic Initiatives translate strategy into a set of high-priority projects that need to be implemented to ensure the success of strategy. Engaged leadership and interactive, two-way communication are the cornerstones of a successful management system. Once the strategic thinking and necessary actions are determined, annual program plans, projects and service level agreements can be developed and translated into budget requests. The balanced scorecard management system is built by the organization’s leaders, managers, and other employees. Facilitated workshops, led by our senior consultants, keep employees at all levels of the organization engaged, on track and on schedule.
Conclusion.
To survive in this highly competitive business world, Companies look not only at the financial factors affecting the business but also give a major consideration for NON-Financial factor like human resources , the process of the company etc which play a very important in the survival of a business unit and give it a competitive edge . Balanced scorecard provides organizations with the means to translate their strategies into actions and measure success from four balanced and interconnected perspectives: financial, customer, internal processes, and learning and growth. The success of which ultimately lead to improved and sustainable financial results.
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