The Balanced Scorecard

The balanced scorecard was developed to provide and measure performance as compared to the organization's objectives, providing feedback and serving as an indicator of overall organizational efficacy. The balanced scorecard typically includes four different performance classifications: financial perspective, customer perspective, internal business processes, and learning and growth, or the development perspective (CTU Online, 2008 and Garrison, Noreen, & Brewer, 2008).

An organization's strategy and value proposition provide the standard of measure by which the different elements of the balanced scorecard are compared. Measures closely aligned with organizational strategy are created by management and communicated to employees to ensure everyone understands what is expected and to provide a point of reference for decision-making applications (Garrison, et al.). In an effort to gauge the effectiveness of strategy implementation and to provide a comparison between actual and planned organizational performance, a good set of performance measures will facilitate an organization-wide focus on those elements that define and support success, provide a common language for those in all levels of the organization through explicit and relevant terms, ensures measurement of appropriate activities, and provides verifiable data (Balanced Scorecard Institute, 2007).

Financial performance measures and standards must be viewed and created alongside qualitative data as maximizing profits is not always the number one goal of production. Although all organization's seek to increase value, some will seek to increase value while maintaining a greater focus on providing newest technologies, most environmentally friendly products, or most excellent customer service and the additional resources consumed by those commitments will cause variances in financial performance and must be taken into consideration when analyzing overall performance. The financial performance of the balanced scorecard will provide more of a historic view at performance and success whereas the remaining, nonfinancial measures are more forward-looking as they relate to planning and operations. Common financial data found in the balanced scorecard include standard costs, measures of income, return on investment, or residual income, all providing specific points of measure and points of reference for creating or adjusting strategy (Edmonds, Edmonds, Tsay & Olds, 2006). Risk assessment, cost benefit, and other financial data can also be included in financial performance measures due to the necessity for timely and accurate funding data, but must always be viewed in balance or with respect to the other factors of measurement (Kaplan & Norton, 2008).

The customer perspective identifies specific target customer segments in the organization's respective industry and specifies expectant and/or desired business unit performance in those consumer segments. Numerous measures, both quantitative and qualitative, are used to formulate and communicate useful customer data information to facilitate a well-developed strategy. Those measures include customer satisfaction and retention, customer acquisition and profitability, market share, and account share. Objectives relative to these different items of measure are used alongside objectives and measures outlined in the value proposition. Value proposition may focus on lowest costs, or best buy, product innovation and industry leadership, or complete customer solutions. Customer perspective cannot be directly addressed without understanding exactly what customers expect, or are guaranteed through the value proposition (Atkinson, et al.). This provides the appropriate direction in strategy formation, as it applies to addressing the needs, satisfying, attaining, and sustaining a strong customer base.

Internal business processes refer to the activities within the organization that occur in an attempt to satisfy and meet customer expectations. With realization of financial and customer objectives, the organization now has the data necessary to identify and adjust the internal processes that will directly impact those objectives. Identifying financial and customer objectives provides an expected performance reference point by which management can determine how it will produce and deliver the value proposition for its customers and achieve the productivity requirements necessary for attaining financial objectives. This internal perspective pinpoints critical processes the organization must excel at to achieve strategical objectives and are generally classified into four separate process groupings: operating processes, customer management, innovation, and regulatory and social processes (Atkinson, et al.).

Operating processes represent the daily processes by which the company produces and delivers their current products and services. Operating processes include raw material acquisition, conversion of raw materials into finished goods, and distribution of those goods to the customer. Performance objectives and measures can be applied to each of these processes by management, and resulting modifications to costs, quality, and process times will ensue with changes aimed at improvement based on the applied performance objectives. Similarly, specific customer management processes such as selection, acquisition, retention and growth are provided specific performance objectives from which adjustments to those processes will provide for continual improvement and alignment with specific process-related goals. The innovation processes represent development of new products, processes and services that enable the organization to penetrate new markets and customer segments and drive customer acquisition, loyalty and growth. Through an improved customer dynamic, the innovation process further serves to enhance the profit margin. Appropriate management of innovation processes includes identification of opportunity for new services and products, effectively managing the R & D portfolio, design and development of new products and services and successful market introduction. Regulatory and social processes refer to the organizations right to operate within the communities they produce and sell. National and local regulations relative to environment, health and safety, employment practices, and community investment all have the potential to increase or decrease value of the organization according to practice and compliance with these regulations. Those regulatory and social processes require effective management and attention that equals the other business processes as recovery from the consequences of non-compliance could prove unrecoverable (Atkinson, et al.).

It is widely realized that continuing education, or learning is essential to consistently improving upon efficacy and remaining competitive. Thus learning, or development is the underlying idea that drives the different elements of measure that provide a balanced view of organizational effectiveness (Garrison, et al.). The learning and growth perspective addresses specific capabilities or competencies of employees or divisions, capabilities and availability of the information and communications system employed in the organization, the organizational climate or culture, and any other process within the organization that directly influences the relationship with the customer and facilitate long-term growth and improvement. The internal perspective provided by the balanced scorecard helps management to identify exactly where resources must be invested to improve employee skills, or enhance any of the other areas of internal business processes that require improvement to maximize on successful strategy implementation. This element of the scorecard communicates specifically how well the organization's intangible assets and managed and leveraged to drive improvement (Atkinson, Kaplan, & Young, 2004). Recognizing that change is inevitable and the organization must be open to and must effectively manage change to remain successful, the learning and growth perspective allows for identification of the areas that might require change or improvement, and ensures the elements of successful change management are realized, employed, and embedded within the organization's culture.

For the organization, the balanced scorecard serves as a customer based planning and improvement tool used with the intent to drive necessary organizational changes to strategy to assist the organization in sustaining competitiveness and ensuring operations are focused in the direction of success as it relates to specified strategical measures. Using financial and non-financial measures, objective and subjective measures, the balanced scorecard effectively communicates performance objectives in numerous areas to the relevant divisions and individuals who can provide feedback and assist in developing and implementing change ideas. Use of the balanced scorecard is said to have many beneficial effects on the organization including promotion of active formulation and implementation of organization strategy, keeps strategies updated and highly visible, improves overall system of communications within the organization, improves goal alignment among the many different departmental and divisional elements of the organization, aligns the short-term plans for operations with long-term goals, and aligns performance measures with long-term strategic goals (Pineno, 2004).

Sources Cited:

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Balanced Scorecard Institute (2007). Performance measurement. Balanced Scorecard Institute.

http://www.balancedscorecard.org/BSCResources/PerformanceMeasurement/tabid/59/

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y., and Olds, P.R. (2006). Fundamental managerial

Kaplan, R. and Norton, D. (2008). The BSC: translating strategy into action. Retrieved on June

http://www.valuebasedmanagement.net/methods_balancedscorecard.html

Pineno, C.J. (2004). Balanced scorecard applications and model building. Management