Balanced Scorecard Definition
A balanced scorecard refers to a planning and management metric that project managers use to project the details of the project and keep track of how it is being executed. In strategic management, a balanced scorecard identifies the internal functions of a business or project, highlights their results and devise ways to improve their outcomes. Through a balanced scorecard, managers are kept abreast of how the operations of a business are being executed and the outcomes of the operations. The balanced scorecard provides feedback on progress and consequences resulting from the internal functions of a business.
A Little More on What is a Balanced Scorecards
Robert Kaplan and David Norton were the first professionals to introduce the balanced scorecard in 1992. This concept was published in a review article titled: “The Balanced Scorecard-Measures That Drive Performance.” The balanced scorecard was developed from other metrics used in measuring the performance of the internal functions of business and giving feedback on the successes and failures of the processes. Factors that impede the performance of a business are also tracked through the balanced scorecard.
Purpose Behind the Balanced Scorecard
The Balanced scorecard seeks to measure the effectiveness of operations and provide feedback to organizations on how well the internal procedures of the business are affecting its performance. Vital areas that a business needs to pay attention for optima growth are also analyzed using the balanced scorecard. The balanced scorecard also provide information on the objectives of a project or business and how they can be worked upon for the business to realize its goals.
There are four primary functions of a business that the balanced scorecard analyse, these are goals, initiatives, objectives and measurements. Organizations who use balanced scorecard are able to implement strategies aimed at improving the business.
The Four Legs of the Balanced Scorecard
There are four legs of a business that a balanced scorecard analyzes, they are learning and growth, business processes, customers, and finance. The balanced scorecard collects information on these four legs and analyze them accordingly;
- Learning and growth: this is the first leg and it entails the information about a business that is presented to employees and how employees convert the information received to a competitive advantage for the business through a learning and growth process.
- Business processes: this examines how products are manufactured in the company and analyze delays, wastage, shortages and bottlenecks that occur during production.
- Customer perspectives: This is the third leg that measures the satisfaction customers derive from the goods and services that a company provides.
- Financial data: this fourth leg examines the income and expenditure of a business as well as its financial statements.
Here are some points to note about a balanced scorecard;
- A balanced scorecard is a method used in strategic management to gauge the internal functions of a business and their outcomes.
- David Norton and Robert Kaplan introduced the balanced scorecard in 1992. This method was an adaptation of previous metric performance measures.
- There are four legs of a business that the balanced scorecard measures, these are; learning and growth, business processes, customers perspectives, and finance.
Reference for “Balanced Scorecard”
Academic research on “Balanced Scorecard”
Linking the balanced scorecard to strategy, Kaplan, R. S., & Norton, D. P. (1996). Linking the balanced scorecard to strategy. California management review, 39(1), 53-79.
Transforming the balanced scorecard from performance measurement to strategic management: Part I, Kaplan, R. S., & Norton, D. P. (2001). Transforming the balanced scorecard from performance measurement to strategic management: Part I. Accounting horizons, 15(1), 87-104. In a previous paper (Kaplan and Norton 2001b), we described the role for strategy maps and Balanced Scorecards to develop performance objectives and measures linked to strategy. With this paper, we show how organizations use their scorecards to align key management processes and systems to the strategy. We also discuss the relation-ship of the Balanced Scorecard (BSC) to other financial and cost measurement initia-tives, such as shareholder value metrics and activity-based costing, and quality pro-grams. We conclude with suggestions about opportunities for additional research on measurement and management systems. THE FIVE PRINCIPLES OF A STRATEGY-FOCUSED ORGANIZATION When asked to describe how the Balanced Scorecard helped them achieve break-through performance, executives of adopting organizations continually referred to two words: alignment and focus (Kaplan and Norton 2001a, Chapter 1). Although each or-ganization achieved strategic alignment and focus in different ways, at different paces and in different sequences, each eventually used a common set of five principles, which we refer to as the Principles of a Strategy-Focused Organization, portrayed in Figure 1. Principle #1: Translate the Strategy to Operational Terms Organizations translate their strategy into the logical architecture of a strategy map and Balanced Scorecard to specify in detail the critical elements for their growth strategies (Kaplan and Norton 2001b). These create a common and understandable point of reference for all organizational units and employees.
The balance on the balanced scorecard a critical analysis of some of its assumptions, Norreklit, H. (2000). The balance on the balanced scorecard a critical analysis of some of its assumptions. Management accounting research, 11(1), 65-88. In recent years academic scholars have given increasing attention to the importance of strategic measurement systems including both non-financial and financial measures. One of the approaches adopted is that of the balanced scorecard. It is distinct from other strategic measurement systems in that it is more than an ad hoc collection of financial and non-financial measures. It contains outcome measures and the performance drivers of outcomes, linked together in cause-and-effect relationships, and thus aims to be a feed-forward control system. Furthermore, the balanced scorecard is intended not only as a strategic measurement system but also as a strategic control system which can align departmental and personal goals to overall strategy. This paper first examines the extent to which there is a cause-and-effect relationship among the four areas of measurement suggested (the financial, customer, internal-business-process and learning and growth perspectives). The paper then examines whether the balanced scorecard can link strategy to operational metrics which managers can understand and influence. Finally, it discusses and suggests some improvements to the balanced scorecard.
The balanced scorecard: Judgmental effects of common and unique performance measures, Lipe, M. G., & Salterio, S. E. (2000). The balanced scorecard: Judgmental effects of common and unique performance measures. The Accounting Review, 75(3), 283-298. The balanced scorecard is a new tool that complements traditional measures of business unit performance. The scorecard contains a diverse set of performance measures, including financial performance, customer relations, internal business processes, and learning and growth. Advocates of the balanced scorecard suggest that each unit in the organization should develop and use its own scorecard, choosing measures that capture the unit’s business strategy. Our study examines judgmental effects of the balanced scorecard—specifically, how balanced scorecards that include some measures common to multiple units and other measures that are unique to a particular unit affect superiors’ evaluations of that unit’s performance. Our test shows that only the common measures affect the superiors’ evaluations. We discuss the implications of this result for research and practice.