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M AGUS SUDRAJAT
The balanced scorecard is the translation of an organization’s mission and strategy into a comprehensive set of performance measures to control organizational activities. It is a sophisticated information system and management approach that links effects (also called organizational objectives, such as profit levels) with causes, such as customer or employee satisfaction.
The balanced scorecard approach focuses on the balanced of both financial and non-financial measures. The balanced scorecard concept suggests that the non- financial measurements are operational measures that drive the future financial performance. The balanced scorecard communicates priorities to management, employees, investors, and even customers. It is used as the focal point for the firm’s efforts in achieving its goals. Firms using the ‘balanced scorecard’ do not have to rely on short-term financial measures as the sole indicators of the company’s performance; the scorecard contributes to linking long-term strategic objectives with short-term processes. Consequently, creating a ‘balanced scorecard’ has forced companies to unite their strategic planning and budgeting, which has helped ensure that their budgets support their strategies.
2. Balanced Scorecard and Performance Measurement
The balanced scorecard is the performance measurement philosophy. The balanced scorecard concept recognizes the importance of measuring performance on multiple financial and non-financial dimensions for influencing business performance. Specifically, this management tool measures the financial, customer, internal business process, learning and growth dimensions of the organization. By adopting such a broad scope approach to performance measurement, managers can observe changes in the market environment, determine and assess progress towards the business unit objectives, and affirm the achievement of business objectives.
3. How Can the Balanced Scorecard Help a Company Improve its Ability to Meet Its Strategies?
By utilizing the balanced scorecard firms can align their performance measurement systems with the goals and strategies of the firm. When effectively designed, the balanced scorecard provides a number of key performance indicators directed at measuring the achievement of the organizations strategies. Furthermore the balanced scorecard uses multiple dimensions to measure the achievement of organizational strategies. These include the financial, internal business process, learning and growth and customer. It is used as the focal point for the firm’s efforts in achieving its goals. To be clear, the use of a BSC does not mean just “using more measures”: it means putting a handful of strategically critical measures together in a single report, in a way that makes cause and effect relations transparent and keeps managers from sub-optimizing by improving one measure at the expense of others.
4. Four Perspectives Covered by the Balanced Scorecard
5. What does it mean with “balanced” in the balanced scorecard approach?
The balanced scorecard is a sophisticated information system and management approach that links effects (also called organizational objectives, such as profit levels) with causes, such as customer or employee satisfaction. It measures performance using multiple dimensions including financial, internal business processes, learning and growth, and customers. The balanced scorecard does not mean that there is the same meaning or weight given to each dimension. The weighting given to each of the dimensions will depend on the strategic priorities and goals of the firm. “Balance” has several meanings. It refers to the notion that management should not pay attention to just one perspective such as customer or financial, but it has to pay attention to all of four perspectives. This suggests that one perspective is not sufficient for maintaining a competitive advantage in today’s changing business environment. The term balanced also refers to the inclusion of both short term and long term objectives and the mix of hard quantifiable and soft subjective measures. The balanced scorecard has the potential to provide managers with a linked set of measures that specifies how the four perspectives of measures stated above can be aligned with overall company strategy, how managers should attend to both financial and non-financial measures of performance, and how they can integrate them.
6. Developing Critical Measures for Each Dimension of the Balanced Scorecard
The balanced scorecard translates the firm’s strategies into objectives and performance measures in each of the four dimensions. To begin with the organizational strategies must be identified. Once this is done critical success factors can be identified. These success factors are necessary for the ongoing success of the company. For instance, one of the company strategies might be to improve returns to shareholders. Shareholder returns can then be identified as a critical success factor. This strategy is consistent with the financial dimension of the balanced scorecard. A suitable performance measure for this objective could be the return on equity. Another strategy might be to increase customer satisfaction to ensure that profits are maximized. This strategy is consistent with the customer dimension of the balanced scorecard. Appropriate performance measures could include percentage increase in market share, number of product returns, number of product defects, number of new customers or number of customers. Another of the organizations strategies might be to improve the quality of products. This relates to the internal business processes perspective. Possible key performance indicators used to measure the achievement of this objective could be number of product defects or number of product returns. Finally, the organization may have a strategy to develop employee’s technical skills. This is consistent with the learning and growth dimension of the balanced scorecard. A possible performance measure for this objective could be the time spent developing employee programs. The choice of performance measure should communicate to employees the drivers of current and future success of the organization.
7. The Limitations from Using the Balanced Scorecard
One of the limitations of the using the balanced scorecard is that it is not easily implemented. The company must have an appropriate facility or information technology to collect, calculate, and analyze the data in a timely and accurate manner. Without appropriate information technology, the implementation of balanced scorecard will costly, time consuming and may be unsuccessful. Further, the vision, mission and the strategy of the company must be clear. Many cases show that the owner and managers do not set these three factors clearly. Another of the limitations of the balanced scorecard approach stems from the willingness of the owner and managers to use the balanced scorecard. The balanced scorecard is a rigid system that needs detail information and analysis. Most of the cases managers do not have enough willingness to sit down and analyze the balanced scorecard data. This would suggest that culture and management style could also influence the success of the balanced scorecard. Some cultures influence the management styles and the evaluation is more subjective rather than objective.
8. The Balanced Scorecard and TQM
Total Quality Management (TQM) is a philosophy based on the notion of continuous improvement. The balanced scorecard provides a feedback mechanism to gauge the organization’s success in achieving quality in all dimensions of the organization. The balanced scorecard is designed to provide a range of financial and non-financial measures, which are used to provide managers with continuous signals as to what is most important in their day-to-day work and where efforts must be directed. To be effective in achieving the TQM goals, TQM firms should implement a BSC-like performance measurement system that identifies appropriate nonfinancial and financial indicators of how the firm is viewed by shareholders (financial perspective), how customers see the firm (customer perspective), in which areas the firm must excel (internal business processes perspective), and how and where the firm can learn and create value (learning and growth perspective). By doing so, the BSC measures can also be designed to pull people toward the firm’s overall TQM program, along with its other organizational strategic priorities.
9. Stronger Market Position and The use of balanced scorecards
Organizations with a strong market position are likely to place greater emphasis on the use of a BSC, to help maintain their strong position. By providing feedback on the essential dimensions (customer perspective, financial perspective, internal business perspective, innovation and learning perspective) of the organization they can manage and control their performance. On the other hand, an organization operating with a weak position in a particular market creates a lesser demand for the use sophistication in management systems. A lesser demand for sophistication suggests a lower deployment of sophisticated management systems such as the BSC. Thus, organizations with a weak market position can be expected to place greater emphasis on traditional, financial oriented, performance evaluation systems for assessing performance.
10. The Organization Size and the Balanced Scorecard
Implementation
The organizations size has an effect on the balanced scorecard implementation. As the size of the firm increases accounting and control processes tend to become more specialized and sophisticated. An increase in size has been linked to greater decentralization and structuring of activities to improve information processing. Furthermore, the need to stimulate effective communication flows becomes more apparent in larger organizations, as in such organizations, the behavioral orientation characterizing management controls in small organizations become unworkable. As a consequence, in large business enterprises, a broader set of information and measurement issues arise. The balanced scorecard can provide such information. Typically, small companies frequently do not require elaborate performance evaluation techniques, such as the balanced scorecard because usually the owners are close to the “action”.
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