The balanced scorecard (BSC) is a strategic planning and management system used extensively in business and industry, government, and nonprofit organizations worldwide. It helps organizations align business activities with the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.
Historical Context
The concept of the balanced scorecard was first introduced by Robert S. Kaplan and David P. Norton in a 1992 Harvard Business Review article. They proposed it as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more ‘balanced’ view of organizational performance.
Types/Categories
Balanced scorecards generally fall into four major categories:
- Financial: Measures reflecting financial performance, such as revenue, profit margins, and return on investment.
- Customer: Measures reflecting customer satisfaction and retention, such as customer satisfaction surveys and retention rates.
- Internal Processes: Measures focusing on internal operational goals and the efficiency of internal processes.
- Learning and Growth: Measures focusing on human capital, organizational culture, and knowledge development.
Key Events
- 1992: Kaplan and Norton introduce the balanced scorecard concept.
- 1996: They publish the book “The Balanced Scorecard: Translating Strategy into Action”.
- Early 2000s: The balanced scorecard evolves from a performance measurement system to a full strategic planning and management system.
Detailed Explanations
The balanced scorecard enables organizations to break down their vision and strategy into measurable operational objectives. Here’s a more detailed look at each category:
Financial
This perspective asks: “How do we look to shareholders?” and focuses on tracking financial performance and the utilization of financial resources.
Customer
This perspective asks: “How do customers see us?” and focuses on customer satisfaction and market share goals.
Internal Processes
This perspective asks: “What must we excel at?” and focuses on the internal processes critical to satisfying customer and shareholder expectations.
Learning and Growth
This perspective asks: “Can we continue to improve and create value?” and focuses on the organization’s ability to innovate, improve, and learn.
Mathematical Formulas/Models
While the balanced scorecard is more of a strategic tool, it often employs specific metrics which can involve various financial formulas and statistical models. Examples include:
- Return on Investment (ROI):
$$ \text{ROI} = \frac{\text{Net Profit}}{\text{Investment}} $$
- Customer Retention Rate:
$$ \text{CRR} = \frac{\text{Customers at End of Period} - \text{New Customers Acquired During Period}}{\text{Customers at Start of Period}} \times 100 $$
Charts and Diagrams
graph TD
A[Vision & Strategy] --> B[Financial Perspective]
A --> C[Customer Perspective]
A --> D[Internal Process Perspective]
A --> E[Learning & Growth Perspective]
B --> F[Financial Goals]
C --> G[Customer Satisfaction]
D --> H[Operational Excellence]
E --> I[Innovation & Learning]
Importance
The balanced scorecard is crucial as it helps:
- Bridge the gap between strategy and execution.
- Align organizational activities with the overall vision.
- Provide a comprehensive view of organizational performance.
- Facilitate communication and understanding of business goals.
Applicability
- Business: To improve performance measurement and strategic management.
- Government: To ensure public sector organizations meet their goals efficiently.
- Nonprofit Organizations: To measure performance beyond financial metrics.
Examples
- A tech company might use customer satisfaction scores to measure the success of a new product launch.
- A hospital could monitor patient wait times and treatment outcomes to improve healthcare services.
Considerations
- Consistent review and update are necessary to keep the scorecard relevant.
- Need for clear definition and understanding of metrics.
- Possible resistance to change within the organization.
Related Terms
- Key Performance Indicator (KPI): A measurable value that demonstrates how effectively a company is achieving key business objectives.
- Strategic Planning: The process of defining a strategy, making decisions on allocating resources to pursue this strategy.
Comparisons
- BSC vs KPI: While KPIs are specific metrics, a BSC is a holistic framework that incorporates various KPIs.
- BSC vs Traditional Financial Measures: The BSC includes both financial and non-financial measures, providing a more comprehensive view of performance.
Interesting Facts
- Over 50% of large US firms had adopted the balanced scorecard within a decade of its introduction.
- The balanced scorecard has been adapted for public and nonprofit sectors.
Inspirational Stories
Companies like Apple and Siemens have successfully implemented the balanced scorecard to improve strategic management and achieve business goals.
Famous Quotes
“You can’t manage what you don’t measure.” - Peter Drucker
Proverbs and Clichés
- “What gets measured gets done.”
- “Balance is the key to success.”
Expressions
- “Hitting the right balance”
- “Keeping score in business”
Jargon
- Lagging Indicator: A measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend.
- Leading Indicator: A measure that signals future events.
Slang
- BizScore: Slang term sometimes used to refer to a business’s balanced scorecard.
FAQs
What is a balanced scorecard?
Why is it called a balanced scorecard?
References
- Kaplan, Robert S., and David P. Norton. “The Balanced Scorecard: Translating Strategy into Action.” Harvard Business Review, 1992.
- Balanced Scorecard Institute. (n.d.). Balanced Scorecard Basics. https://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard.
Final Summary
The balanced scorecard is a powerful tool for strategic management and performance measurement, providing a balanced view that includes financial and non-financial metrics. Since its introduction in 1992 by Kaplan and Norton, the BSC has become a widely adopted framework across various sectors to help organizations align activities with their strategic goals and improve overall performance. By understanding and implementing the balanced scorecard, organizations can effectively translate their vision into actionable objectives, measure their performance comprehensively, and achieve sustained success.
