Balanced Scorecard (Performance Management) - Explained
What is the Balanced Scorecard?
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Table of ContentsWhat is the Balanced Scorecard?Dimensions of the Balanced ScorecardImplementing the Balanced ScorecardEffects of the Balanced ScorecardAcademic Research on "Balanced Scorecard"
What is the Balanced Scorecard?
The Balanced Scorecard is a Performance Management System that 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.
The Balanced Scorecard was developed in the early 1990s by Robert Kaplan and David Norton. It expands upon the Management by Objective model by providing a framework for translating the company's mission, strategy, and values into quantifiable, measurable goals, and objectives.
Dimensions of the Balanced Scorecard
The Business Scorecard analyzes the organization based upon four criteria:
- Customers - Maintaining standards of customer satisfaction and retention.
- Learning and Growth - Measures of management effectiveness, employee satisfaction, and performance of information systems.
- Internal Business - Meeting standards for productivity, innovation, and projections for future productivity.
- Financial - Meeting standards for profitability, operating costs, and return-on-investment.
Implementing the Balanced Scorecard
The first step in implementing the balanced scorecard is that any higher-level goal is categorized within these dimensions. Then, the manager would create a strategy map that links the goal to other dimensions of the scorecard. Next, the relevant managers will develop objectives that further the goals and metrics for assessing progress in achieving the objective. This will include identifying specific tactics that can be employed in carrying out these objectives. Collectively this makes up the strategic plan. Finally, the manager assigns tasks to employees to implement the strategic plan.
Effects of the Balanced Scorecard
This framework allows managers to continuously monitor employee performance and to make immediate corrections when necessary. Lower-level objectives and performance measures are tied closely to individual employee performance. This is also employees by providing the information necessary for making autonomous decisions. Managers carry on their core functions. Financial goals are translated into unit-level budgets and production goals. It also seeks to assess performance beyond purely financial goals and objectives to focus on goals and objectives that further the companys strategy.
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 anad hoccollection 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.