Balanced Score Card and Perspectives
Quality Assurance Engineer
Balanced Score Card (BSC) is a strategy execution framework developed by Robert Kaplan and David Norton. In this article, four perspectives of BSC are mentioned, mostly. The financial perspective indicates whether the transformation of a strategy leads to improved economic success. The customer perspective defines the customer/market segments in which the business competes. The internal business processes that are often classified as mission oriented and support oriented. The learning and growth perspective describes the infrastructure necessary for the achievement of the objectives of the other three perspectives.
This article’s aim is to define the four perspectives of Balanced Scorecard with the strategies.
Many of emerging methodologies have caused a pollution of concepts and definitions that almost bombard our lives with many misunderstanding and comments about what they are or what they are not.
As with many other concepts and definitions like JIT, TQM, Lean Production, Kaizen, Change Management, Six-Sigma and so on, BSC also has a lot of research on what it is and what is not as a new concept that emerged in the 1990s. It is a concept that remains and continues to be the subject of books and articles. BSC has found many application areas in the private and public sector, has become a part of daily life in today’s economic system and maintain its feature that is being one of the common concepts.
This project explains the meaning of balanced scorecard, gives an information about the origin and literature of BSC. Also, this paper involves an information about Balanced Score Card’s four perspectives: financial, customer, internal and learning and growth.
2. ORIGIN OF THE BALANCE SCORECARD METHOD
The Balanced Scorecard was developed by Robert Kaplan and David Norton (1992). In 1990, Kaplan and Norton led a research study of a lot of companies with the purpose of exploring the new methods of performance measurement. The importance of the study was a growing belief that financial measures of performance were ineffective for the modern business enterprise. Representatives of the study companies, along with Kaplan and Norton, were convinced that reliance on financial measures of performance had an effect on their ability to create value. The group discussed a number of possible alternatives but settled on the idea of a scorecard, featuring performance measures capturing activities from throughout the organization customer issues, internal business processes, employee activities, and of course shareholder concerns. Kaplan and Norton introduced the new tool the Balanced Scorecard and later summarized the concept in the first of three Harvard Business Review articles, “The Balanced Scorecard—Measures That Drive Performance.” (Isoraite, 2008).
The Balanced Scorecard resembles a typical Management fashion. For instance, Van den Heuvel & Broekman wrote that “a self-respecting organization apparently can no longer do without the Balanced Scorecard” (1998) and Hers (1998) pointed to an abundance of congresses, seminars and publications on the theme. In crescendo, commentators spoke of “a real trend” (Koning & Conijn, 1997), “a fad-like impression” (Du Mée, 1996) and “a true hype”(Hers, 1998). Such statements suggest that the Balanced Scorecard has become popular and brought about many changes in a variety of organizations. (Isoraite, 2008).
2.1. Literature Review
Several years ago, the Balanced Scorecard was introduced by Kaplan and Norton. At the time, we thought the Balanced Scorecard was about measurement, not about strategy. We began with the premise that an exclusive reliance on financial measures in a management system was causing organizations to do the wrong things. Financial measures are lag indicators; they report on outcomes, the consequences of past actions. Exclusive reliance on financial indicators promoted short-term behavior that sacrificed long-term value creation for short-term performance. The Balanced Scorecard approach retained measures of financial performance, the lagging indicators, but supplemented them with measures on the drivers, the lead indicators, of future financial performance (Brown, 2000).
But what were the appropriate measures of future performance? If financial measures were causing organizations to do the wrong things, what measures would prompt them to do the right things? The answer turned out to be obvious: Measure the strategy! Thus all of the objectives and measures on a Balanced Scorecard – financial and nonfinancial – should be derived from the organization’s vision and strategy. (Chavan, 2009).
Although we may not have appreciated the implications at the time, the Balanced Scorecard soon became a tool for managing strategy – a tool for dealing with the 90 percent failure rate (Kaplan and Norton, 2001b).
The concept of the balanced scorecard (BSC) was first presented in the early 1990s. By 2000 some surveys indicated that a majority of firms in the United States, and Scandinavia used scorecards – or at least intended to do so soon. Others, like Bain’s management tools survey, indicated a slight drop in usage to 36 per cent, but with a high average satisfaction with the tool. The number of software packages for scorecard on the market was growing and exceeds 100 today. In only ten years, the idea of the balanced scorecard has certainly made its mark. (Gadenne, 2000)
2.2. What is Balanced Scorecard?
The BSC was originally created primarily as a measurement system and as an answer to a criticism concerning the unilateral measurement of the performance ability of a company. It was organized through four different perspectives (Isoraite, 2008):
- The financial perspective: to succeed financially, how should we appear to our shareholders? Examples of this perspective include financial ratios and various cash flow measures (Isoraite, 2008).The financial perspective indicates whether the transformation of a strategy leads to improved economic success. Thus, the financial measures assume a double role. On one hand, they define the financial performance a strategy is expected to achieve. On the other hand, they are the endpoint of cause and effect relationships referring to the other BSC perspectives (Figge et al. 2002).
- The customer perspective: to achieve our vision, how should we appear to our customers?Examples of this perspective include the amount of time spent on customer calls and customer survey data (Isoraite, 2008).The customer perspective defines the customer/market segments in which the business competes. By means of appropriate strategic objectives, measure, targets and initiatives the customer value proposition is represented in the customer perspective through which the firm/business unit wants to achieve a competitive advantage in the envisaged market segments (Figge et al. 2002).
- The internal perspective: to satisfy our shareholders and customers, what business processes must we excel at?The internal business processes that are often classified as mission oriented and support oriented. Examples of this perspective include the length of time spent prospecting and the amount of rework required (Isoraite, 2008).The internal process perspective identifies those internal business processes that enable the firm to meet the expectations of customers in the target markets and those of the shareholders (Figge et al. 2002).
- The learning and growth perspective: to achieve our vision, how will we sustain our ability to change and improve?Includes employee training and organizational attitudes related to both employee and organizational improvement. Examples of this perspective include the amount of revenue that comes from new ideas and measures of the types and length of time spent training staff (Isoraite, 2008).Finally, the learning and growth perspective describes the infrastructure necessary for the achievement of the objectives of the other three perspectives. In this case, the most important areas are qualification, motivation and goal orientation of employees, and information systems (Figge et al. 2002).The purpose of a BSC is to formulate a hierarchic system of strategic objectives in the four perspectives, derived from the business strategy and aligned towards the financial perspective. Based on such a causal system of objectives, corresponding measures are formulated in all four perspectives (Figge et al. 2002).
Figure 1. BSC Quality Management Model Král, B. et al., 2010, Havlícek, K., 2009,
- Financial targets: Economic performance, profitability, liquidity, annual increase, value of the company (Havlicek et al. 2013).Managerial task: Implement into the company and subsequently manage the owners’ requirements (Havlicek et al. 2013).
- Customers’ targets: Quality of service, loyalty, long-term relationship, etc. (Havlicek et al. 2012).Managerial task: To understand and manage the wishes and requirements of our customers (Havlicek et al. 2013).
- Internal targets: Productivity, incentive programs, responsibilities, protection of employees, etc. (Havlicek et al. 2013).Managerial task: To create an internal environment with high competitive advantage (Havlicek et al. 2013).
- Learning and Growth targets: Knowledge management, creative teams, a high degree of innovation of basic and higher orders, system of education and staff development, etc. (Havlicek et al. 2013).Managerial task: To manage changes and continuous (Havlicek et al. 2013).
Figure 2. Example of a Balanced Scorecard Kaplan, R. S., & Norton, D. P. (2000).
2.3. Building a Balanced Scorecard
Each organization is unique and so follows its own path for building a balanced scorecard. At Apple and AMD, for instance, a senior finance or business development executive, intimately familiar with the strategic thinking of the top management group, constructed the initial corecard without extensive deliberations. At Rockwater, however, senior management had yet to define sharply the organization’s strategy, much less the key performance levers that drive and measure the strategy’s success. Companies like Rockwater can follow a systematic development plan to create the balanced scorecard and encourage commitment to the scorecard among senior and mid-level managers. What follows is a typical project profile: (Kaplan & Norton, 2007).
- Preparation: The organization must first define the business unit for which a top-level scorecard is appropriate. In general, a scorecard is appropriate for a business unit that has its own customers, distribution channels, production facilities, and financial performance measures (Kaplan & Norton, 2007).
- Interviews: First Round Each senior manager in the business unit—typically between 6 and 12 executives—receives background material on the balanced scorecard as well as internal documents that describe the company’s vision, mission, and strategy. The balanced scorecard facilitator (either an outside consultant or the company executive who organizes the effort) conducts interviews of approximately 90 minutes each with the senior managers to obtain their input on the company’s strategic objectives and tentative proposals for balanced scorecard measures. The facilitator may also interview some principal shareholders to learn about their expectations for the business unit’s financial performance, as well as some key customers to learn about their performance expectations for top-ranked suppliers (Kaplan & Norton, 2007).
- Executive Workshop: First Round The top management team is brought together with the facilitator to undergo the process of developing the scorecard (see the chart “Begin by Linking Measurements to Strategy”). During the workshop, the group debates the proposed mission and strategy statements until a consensus is reached. The group then moves from the mission and strategy statement to answer the question, “If I succeed with my vision and strategy, how will my performance differ for shareholders; for customers; for internal business processes; for my ability to innovate, grow, and improve?” (Kaplan & Norton, 2007).
Figure 3. The Relationship Between Strategy and Performance Criteria (Kaplan & Norton, 2007).
- Interviews: Second Round The facilitator reviews, consolidates, and documents the output from the executive workshop and interviews each senior executive about the tentative balanced scorecard. The facilitator also seeks opinions about issues involved in implementing the scorecard (Kaplan & Norton, 2007).
- Executive Workshop: A second workshop, involving the senior management team, their direct subordinates, and a larger number of middle managers, debates the organization’s vision, strategy statements, and the tentative scorecard. The participants, working in groups, comment on the proposed measures, link the various change programs under way to the measures, and start to develop an implementation plan. At the end of the workshop, participants are asked to formulate stretch objectives for each of the proposed measures, including targeted rates of improvement (Kaplan & Norton, 2007).
- Executive Workshop: Third Round The senior executive team meets to come to a final consensus on the vision, objectives, and measurements developed in the first two workshops; to develop stretch targets for each measure on the scorecard; and to identify preliminary action programs to achieve the targets. The team must agree on an implementation program, including communicating the scorecard to employees, integrating the scorecard into a management philosophy, and developing an information system to support the scorecard. 7. Implementation A newly formed team develops an implementation plan for the scorecard, including linking the measures to databases and information systems, communicating the balanced scorecard throughout the organization, and encouraging and facilitating the development of second-level metrics for decentralized units. As a result of this process, for instance, an entirely new executive information system that links top-level business unit metrics down through shop floor and site-specific operational measures could be developed. 8. Periodic Reviews Each quarter or month, a blue book of information on the balanced scorecard measures is prepared for both top management review and discussion with managers of decentralized divisions and departments. The balanced scorecard metrics are revisited annually as part of the strategic planning, goal setting, and resource allocation processes (Kaplan & Norton, 2007).
This paper presents the definition of Balance Scorecard and its four perspectives. Also, this paper shows a method for creating the strategy map of the companies. Balanced Scorecard is one of the techniques every business (decision maker) should have in order to make effective decisions. Every company wants to benefit from these techniques.
In fact, every manager uses some criteria when making a decision. Unlike, BSC allows us to consider many indicators that are integrated into each other, are purposeful and do not only cover the short term. . If BSC is applied in an organization, target deviations will be reduced, since the goal will be unity in the employees and the strategies will be directed towards it. In addition, the institution will have a dynamic structure. In this way, the strategy to be created will spread to the base, meaningful performance indicators will emerge through BSC, and ultimately accurate decisions can be made. Businesses that implement BSC should update frequently to stay dynamic and alive; according to the indicators, they should reshape their vision and strategies if necessary.
As a result, there is an increasing use of BSC in today’s developing information technology world and its new economic order.
It is the opinion formed during this project work; using the power of the BSC model, we can create “real-time” management methods of organizations. The strategic map and measurement results created in this way will give the top management a responsibility for a sustainable and permanent development-expansion for a business management system, and will ensure that quality management reaches the desired level in the management systems of the companies.
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