Balanced Scorecard: Definition, Perspectives, Importance & Benefits

Are you looking for a Business Management System that can help you in finding out and optimising the internal functions of your business and associated outcomes? Then Balanced Scorecard can be the right performance metric that can enable you to focus upon your business goals.

Balanced Scorecard also assists you in choosing the right parameters and factors that can act as a bridge and help you in reaching those goals.

In this approach, along with the traditional financial measures, strategies measures are also adeptly analysed for having a well-balanced view of the performance.

Also known as BSC, Balanced Scorecard acts as a Strategic Planning and Management System that helps a business in

  • Measuring and analysing the progress towards strategic goals
  • Communicating the goals or objectives that they are trying to achieve
  • Ensuring the right prioritisation of products, projects, and services
  • Aligning the daily work as per the business strategy

In this class, we will be talking about everything about the balanced scorecard and try to understand how it helps businesses in having a better performance management mechanism. So, without taking any further, let us get started-

Introduction to the Concept of Balanced Scorecard

Introduction to the Concept of Balanced Scorecard

You must have heard that accomplishing business goals is directly proportional to the measurement system of the organisation.

If you want to understand the meaning of it, then no better concept understanding the Balanced Scorecard Concept.

Most of the top-level managers of different companies tend to understand that the measurement of their organisation on both high-level strategy and low-level measures strongly affects the behaviour that employees and managers would have.

Balanced Scorecard plays a crucial role in breaking down the big and fuzzy strategic vision of an organisation into different actionable steps in a more specific and result-driven manner.

There are some traditional measures of accounting which can be pretty misleading for some employees. This can result in a decrease in innovation and improvement for sure. However, these are the things that the current business environment would want to have, as well.

Balanced Scorecard offers that organisational management by including the financial measures of past actions and operational measures that can play a crucial role in future financial performance.

Hence, the companies need to ensure that they can have the best management for the success of the company for sure.

This is precisely what we are going to talk about right now. We are going to tell you all about the balanced scorecard which helps in management.

To define Balanced Scorecard, it can be said that it is a pretty great system of management.

This is just a way of looking at the company in a way that would put the primary focus on some of the long-term strategic goals for the best results. This allows people to choose certain things that would be deemed correct to measure.

With the help of Balanced Scorecard, a manager can look upon the business from four different perspectives, and they are-

  • Financial Perspective
  • Customer Perspective
  • Internal Business Perspective
  • Innovation and Learning Perspective

We will understand these perspectives later; first, let us have a look upon the origin of this concept-

Origin of Balanced Scorecard Concept

Origin of Balanced Scorecard Concept

First Art Schneiderman created the concept of Balanced Scorecard, and later, Robert Kaplan and David Norton introduced this Strategic Performance Management System.

In the words of Kaplan and Norton-

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”

As per their concepts, Balanced Scorecard can be understood as a reporting system that works through proved Design Methods and Tool that managers can use for measuring the performance of their staff.

Balanced Scorecard is primarily used in

  • Business and industry
  • Government
  • Nonprofit organisations

So, all in all, this system is practised by all the major business models worldwide.

Global Use of Balanced Scorecard

More than 50% of top companies in Europe, the US and Asia are opting for Balanced Scorecard.

This practice is also being quite popular in Africa and the Middle East.

As per a recent report by Bain & Co, a balanced scorecard secured the fifth position in a list of top 10 most used Management Tools across the globe.

Balanced Scorecard is also considered one of the most influential business ideas in the last 75 years by the editors of Harvard Business Review.

Hence, businesses can use BSC to measure key things and find themselves getting closer to the goals that they wanted to achieve in the first place. So, there is not a single speck of doubt that the Balanced Scorecard system is a pretty great one, to begin with.

We are sure that it is going to come in very handy when you need to establish and manage a business on your own in the best way without any trouble or hassle in the future.

Back in time, the companies used to judge the abilities and health of the company by actually measuring the amount of money that they were making. However, times have certainly changed a lot. While the financial measures are still pretty necessary, they are just a part of it.

So, you only get a little part of the picture when you measure the financial success of a company. However, some other things are essential, as well. Commercial success is just a short-term measurement option for companies these days.

This is where the balanced scorecard comes forth to help the people out in the best way.

With the help of the balanced scorecard system companies can find new and exciting strategic measures for sure. These new measures, combined with the old ones, are going to get the right results.

Don’t know what we are talking about?

With the help of these measures, the companies will easily be able to evaluate the performance of the company for sure.

So, who wouldn’t want to try out something like that, right? We are sure that you would.

Let us now understand why Balanced Scorecard with an example-

Understanding the Balanced Scorecard Concept with real-life Example

Understanding the Balanced Scorecard Concept with real-life Example

Summarise the Balanced scorecard to be something like the indicators of sailing a ship.

For the complex task of navigating and sailing a boat, sailors need detailed information about many aspects of the boat.

They need information on fuel, airspeed, ship’s draft, and displacement, weather force and direction, hull and propeller roughness, and other pointers that compile the current and predicted environment.

Dependence on one means can be fatal.

Likewise, the complexity of managing an organisation today requires managers to be able to view performance in several areas simultaneously.

What if only Financial Evaluation is done?

Typically, companies have evaluated their performance by the money that they make.

The financial measure is essential, but they do cover the entire picture.

They happen to focus on the short-term, but it is required to build an organisation that stands the test of time.

With changing company scenarios, the main focus has inclined towards customer satisfaction and other operational factors. However, choosing between financial and operational measures can give spurious results.

So, now we hope you would have understood why opting for a balanced scorecard is essential for a business. Let us now understand its importance in a more in-depth manner-

Understanding the Importance of a Balanced Scorecard

When you need to make sure that you can use the Balanced Scorecard model in the best way, it is essential to make sure that you have an idea about the importance of it for sure. With the help of the balanced scorecard model, ethical behaviour in the company can be established in the best way.

The companies can isolate four different and essential areas for analysis in the best way. These are the four areas which are also known as legs. These are learning, business processes, finance, and customers.

When a company uses the balanced scorecard method, there is no doubt that the company would easily be able to attain all the measurements, objectives, goals, and initiatives most amazingly. These options tend to be the result of these primary essential functions of the business for sure.

Individual companies can identify different factors of business performance with this model. So, it can be said without any doubt that using this method is going to get some great results for everyone.

That is probably one of the main reasons why people want to try it out in the companies that they have. If you are looking for some results, we are sure that this model is going to work.

So, now as you are well aware of the importance of Balanced Scorecard, let us now go through the four perspectives of Balanced Scorecard-

The Four Perspectives: Know All About Them

The Four Perspectives Know All About Them

There are four different perspectives in the Balanced Scorecard model, and here we are going to discuss all of them. Make sure that you are listening to what we have to say for sure.

1) Financial

There are specific financial measures which are essential to ensure the success of the company for sure. Business objectives are the ones that are pretty easy to define and hence play a significant role in understanding the performance of the company.

Financial perspective has been the prime most focus of the business while measuring success, and it is also equally integral to the balanced scorecard analysis. You need to analyse this perspective for finding out if your business is making money, if your shareholders are satisfied, etc.

It also tells you about the outcomes of your past decisions. Adept monetary management is ensured by measuring the financial perspective of Balanced Scorecard.

2) Customer

The customer-related objectives, as well as measures, are also pretty noteworthy as they tend to focus primarily on the expectations and the satisfaction of the customers in the best way.

So this is another perspective that people need to focus on.

It guides you about the people who are going to buy your products or services. Who your prospects are, how much satisfied your existing customers are, sorts of analysis is done in the customer perspective of Balanced Scorecard.

3) Internal Processes

Here is another aspect that is going to be essential for the entire Balanced Scorecard model to work. The running of the business is measured with the help of these objectives and measures. So, this is also an essential part of the model.

With the help of internal business process measurement, you will be able to find out how smooth your business proceedings are. You will also get to know if your workforce and working systems are efficient enough or not.

Increasing efficiency and optimising the performance are the prime features of the Internal Process perspective of Balanced Scorecard.

In this perspective, you will be required to have a holistic approach, so you can pay heed to all the factors that ensure the business success

4) Learning and Growth

With this perspective, an organisation needs to find out if its working system is well aware of the new trends, feedbacks, key improvement metrics, and so forth.

The measures and objectives which concern the performance of the organisation play a significant role in the entire model. The production, skills, company culture, training, leadership, and so much more are measured in the best way.

It checks if all the members are having the right kind of training to grow as per the changing industry standards to ensure the growth of the company.

Knowledge and implementations of new tools and systems are also analysed in this perspective of the balanced scorecard.

Now, when you have understood the significance of the perspectives of the balanced scorecard, you need to know how a business should organise these. So, let us recognise that as well-

Organising Perspectives of Balanced Scorecard

For holding the perspectives of a balanced scorecard, the base should be Learning and Growth, as this will help your organisation have a trained workforce that also has the culture of information sharing.

So, with a Learning and Growth perspective, an organisation will have a smooth Internal Business Process.

When your business has hassle-free channelisation, it will adeptly serve its customers.

If you have the satisfied customer base, you will for sure appreciate better selling, and hence improved financial existence.

So, the organisation of Balanced Scorecard Perspectives can be-

Learning and Growth

Internal Business Process

Customer

 Financial

Next thing that comes in creating a balanced scorecard is creating strategic objectives for different perspectives, so let us have a look upon that as well-

Strategic Objectives of Balanced Scorecard Perspectives

Various aspects of the balanced scorecard can also have some strategic objectives as well. You need to figure them out in an adept fashion.

Let us have a look upon some of the strategic objectives of each perspective here and now-

1) Learning and Growth Strategic Objectives Examples

  • Increasing employee expertise
  • Optimising Technology
  • Optimising Human Capital
  • Improving Thought Leadership

2) Internal Business Process Strategic Objectives Examples

  • Improving Internal Efficiency
  • Increasing Acquisitions
  • Increasing Consulting Knowledge Sharing
  • Improving Product/Service Offerings

3) Customer Strategic Objectives Examples

4) Financial Strategic Objectives Examples

  • Reducing Costs
  • Increasing profits
  • Increasing Revenue in Targeted Markets

After finding out the strategic objectives of all perspectives, you need to create the strategy maps for showing the cause and effect chain.

Once you do the strategy mapping, you need to measure a few key metrics that can tell how your business or team is performing.

For instance, if your strategic objective is Increasing Acquisition, you will be supposed to measure ‘Number of New Acquisitions’.

This will help you in better strategic planning and management.

Benefits of Balanced Scorecard

Some of the key benefits of Balanced Scorecard are-

1) Ease of view- Evaluate better

A balanced scorecard is a supervision system that helps people sitting on the top have a quick and comprehensive view of the business. It is a performance metric used to identify and improve various internal business functions and their resulting external outcomes.

The scorecard gives consequences of the financial decisions already made by the company. Apart from that, the operational measures of a company are its growth activities, or customer satisfaction are also evaluated. It is these operational measures that define the future financial scenario of an organisation.

2) Exclusive reports- Check on competition

Looking at how this scorecard enhances a company’s performance, numerous companies have already adopted the balanced scorecard. It tends to meet the functional obligations of managers. The scorecard brings along with its exclusive management reports covering the company’s competitive aspects. It includes:

  • Improving quality
  • Enhancing teamwork
  • Becoming customer-oriented
  • Cutting response time
  • Reducing new product launch times
  • Running long term

3) Achieving goals – Check on sub-optimization

Following, the scorecard checks while measuring the performance of a company that one aspect does not overpower the others.

By allowing senior managers to examine all the critical operational areas together, the balanced scorecard lets them perceive whether improvement in one area may have been obtained at the expense of another. Achieving objectives has never been easier.

Balanced Scorecard Wrap Up!

So, that is all you need to know about the balanced scorecard model. We are sure that it is going to work in the best way for sure.

The Balanced Scorecard (BSC) is being broadly used in trade and industry, government, and nonprofit organisations worldwide to regulate business actions to the vision and strategy of the company, enhance internal and external interfaces, and monitor organisation performance against strategic goals. Get your scoreboard now.

With the help of Balanced Scorecard, you will be able to connect different dots to showcase a visible connection amongst projects, KPIs, objectives, vision, mission, and strategy of the company.

What are your thoughts about the use of a balanced scorecard for the successful channelisation of any business? Share your views with us in the comments below.

Do you want us to help you in making the balanced scorecard of your business? Then share your business details with M91 team and our experts will guide you in the process.

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