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Balanced scorecard refers to a performance management tool used by a management team. It is a semi-standard structured report, supported by design methods and automation tools. To keep track of the execution of activities by the staff within the control and to monitor the consequences arising from these actions, managers use this report. The characteristics that define a balanced scorecard are:
The first generation scorecard identifies what measures are used to track the implementation of a strategy to design a balanced scorecard which is included in Kaplan and Norton’s writing. This is done by using a “four perspective” approach and they were as follows:
For example, consider Senior managers at ECI. They have established general goals to improve customer performance i.e. get standard products to market sooner, improve customers time to market, become customers supplier of choice through partnerships with them, and develop innovative products tailored to customer needs. The managers translated these general goals into four specific goals and identified an appropriate measure for each.
In order to check whether the specific goal of providing a continuous stream of attractive solutions is met or not, ECI measured the percent of sales from new products and the percent of sales from proprietary products. This information was available internally. Certain other measures forced the company to get data externally. To assess whether the company was achieving its goal of providing reliable, responsive supply, ECI collected response from its customers. The response from the customer’s defined “reliable, responsive supply” differently, ECI created a database of the factors as defined by each of its major customers.
The second generation scorecard is based on strategic linkage model or strategy map. This scorecard allows the individuals and the teams to define a set of strategic objectives. These strategic objectives are plotted on a strategy map. The third generation balanced scorecard refined the second generation of the balanced scorecard to give more relevance and functionality to strategic objectives. Here testing of the business model is done by securing greater clarity between the assumed non-financial drivers of performance and cash flow.
For the successful development and implementation of a strategic scorecard, Kaplan and Norton identified five key principles. They were:
Why does a business need a balanced scorecard? The benefits of adopting a balanced scorecard approach to performance management may include:
The balanced scorecard consists of leading and lagging metrics that the company, even departments, and individuals can be evaluated to determine whether they are on track. The executives are forced to put much concentration into performance management as the strategy map solves the performance dilemma between the financial objectives and the performance management goals to meet up the mission and vision of the organization. Once a scorecard is ready to manage performance, employees come to know how their job makes a difference to the company by showing how their tasks contribute to departmental goals, which ultimately leads to financial accomplishments that push the company closer to its vision. With a scorecard, employees know where they stand, and can easily determine in what areas they can contribute to the success of an organization’s strategy.
The balanced scorecard is a very important management tool for organizations in identifying the pressure points, set-up of objectives, planning, and budgeting. It helps not only to measure the performance but also to decide the strategies that are needed to adopt, to achieve the goals of an organization. Its application ensures the consistency of vision and action which are the important factors for the development of a successful organization. The proper implementation of the tool ensures the development of competencies of an organization which finally leads to the competitive advantage.
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