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Balanced Scorecard as a Management Tool

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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:

  • It mainly focuses on the strategic plan of the organization concerned
  • To monitor it selects a small number of data items
  • It is a mix of financial data items and non-financial data items

Development of balanced scorecards:

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:

  • The Financial perspective: These measures typically focus on the profit and market share in a private sector whereas, in the public sector, financial measures include the results-oriented measures required by the Government Performance and Results Act of 1993 (GPRA). Managers should be answerable to a question, “How do we look to Congress, the President, and other stakeholders”?
  • The Customer’s perspective: Here the managers should evaluate whether their organization is satisfying the customer needs or not. They must be able to answer a question, “How do customers see us”?
  • Internal business process perspective: To satisfy the customer’s needs, managers have to focus on the critical operations. They should answer the question, “What must we excel at”?
  • Organizational learning and growth perspective: The value of an organization depends upon its ability to innovate, improve, and learn. Managers must pose a question, “Can we continue to improve and create the value for our services”?

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.

Implementation of balanced scorecard:

For the successful development and implementation of a strategic scorecard, Kaplan and Norton identified five key principles. They were:

  • Translate strategy into operational terms
  • Align the organization to the strategy
  • Make strategy everyone’s job
  • Make strategy continual process-strategy management meetings and the learning process
  • Mobilise change through executive leadership

Why does a business need a balanced scorecard? The benefits of adopting a balanced scorecard approach to performance management may include:

  • It creates a strategic view of performance in the long term
  • It broadens the view of divisional managers in concluding what represents good performance away from the solely financially oriented view
  • Organizations can develop performance measures that are explicitly aligned to the corporate strategy
  • Considers customer viewpoint which is critical in any business
  • Can promote accountability as each performance measure could be the responsibility of a nominated individuals
  • The implementation of the balanced scorecard should be relatively simple and understandable

Measurement:

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.

Limitations:

  • It involves a lot of subjectivity. So, it not easy to implement.
  • This tool is more complex when compared to other tools.
  • Creating a balanced scorecard for an entire organization is a difficult task.
  • For effectiveness, the entire organization should understand the theory for the use of balanced scorecard.

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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Balanced scorecard as a management tool. (2018, October 22). GradesFixer. Retrieved October 28, 2020, from https://gradesfixer.com/free-essay-examples/balanced-scorecard-as-a-management-tool/
“Balanced scorecard as a management tool.” GradesFixer, 22 Oct. 2018, gradesfixer.com/free-essay-examples/balanced-scorecard-as-a-management-tool/
Balanced scorecard as a management tool. [online]. Available at: <https://gradesfixer.com/free-essay-examples/balanced-scorecard-as-a-management-tool/> [Accessed 28 Oct. 2020].
Balanced scorecard as a management tool [Internet]. GradesFixer. 2018 Oct 22 [cited 2020 Oct 28]. Available from: https://gradesfixer.com/free-essay-examples/balanced-scorecard-as-a-management-tool/
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