Balanced Scorecard

Introduction to Balanced Scorecard

The Balanced Scorecard (BSC) is a strategic planning and management system developed by Robert Kaplan and David Norton in the early 1990s. It provides a framework for translating an organization's strategic objectives into a set of performance measures across four balanced perspectives.

The Four Perspectives

1. Financial Perspective

The financial perspective addresses the question: "How do we look to shareholders?" It captures the traditional financial metrics that indicate whether strategy execution is contributing to bottom-line improvement.

Key Metrics:

• Revenue growth
• Profit margins
• Return on Investment (ROI)
• Return on Equity (ROE)
• Economic Value Added (EVA)
• Cash flow

2. Customer Perspective

The customer perspective asks: "How do customers see us?" It focuses on customer satisfaction, retention, and acquisition, as well as market share.

Key Metrics:

• Customer satisfaction scores
• Customer retention rate
• Net Promoter Score (NPS)
• Market share
• Customer acquisition cost
• Customer lifetime value

3. Internal Business Process Perspective

This perspective addresses: "What must we excel at?" It identifies the critical internal processes in which the organization must excel to satisfy customers and shareholders.

Key Metrics:

• Process cycle time
• Quality rates / defect rates
• Productivity measures
• Cost per unit
• Process innovation rate
• Compliance and safety metrics

4. Learning and Growth Perspective

The learning and growth perspective asks: "Can we continue to improve and create value?" It focuses on the intangible assets of an organization, mainly employee capabilities, information systems, and organizational climate.

Key Metrics:

• Employee satisfaction and engagement
• Employee turnover rate
• Training hours per employee
• Skills inventory
• Information system capabilities
• Innovation indicators

Building a Balanced Scorecard

Step 1: Define Strategy

Clarify the organization's mission, vision, and strategic objectives.

Step 2: Create Strategy Map

Develop a visual representation showing cause-and-effect relationships between objectives across the four perspectives.

Step 3: Define Measures

Select key performance indicators (KPIs) for each objective. Ensure measures are SMART: Specific, Measurable, Achievable, Relevant, Time-bound.

Step 4: Set Targets

Establish performance targets for each measure.

Step 5: Launch Initiatives

Define strategic initiatives required to achieve targets.

Benefits of the Balanced Scorecard

• Balanced View: Provides a comprehensive view beyond financial metrics
• Strategy Alignment: Links operational activities to strategic objectives
• Communication: Communicates strategy throughout the organization
• Performance Management: Enables better performance tracking and management
• Cause-Effect Understanding: Shows how improvements in one area affect others
• Focus: Helps prioritize initiatives that drive strategic success

Strategy Maps

A strategy map is a diagram that shows cause-and-effect relationships between strategic objectives. It illustrates how:

• Learning and growth enables internal process excellence
• Process excellence drives customer value
• Customer value creates financial returns

Common Challenges

• Too many measures (should be 15-25 total)
• Lack of executive sponsorship
• Treating BSC as a one-time project
• Not linking to compensation
• Insufficient data availability
• Resistance to change

Conclusion

The Balanced Scorecard remains one of the most powerful tools for strategy execution. When properly implemented, it aligns organizational activities with vision and strategy, improves internal and external communications, and monitors performance against strategic goals.