Balanced Scorecard

Article byPrakhar Gajendrakar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Balanced Scorecard Definition

A Balanced Scorecard (BSC) is a deeply integrated performance metric that help organizations identify internal problems and overcome them through effective planning, strategy, and executions. It can be feedback, information, raw data, and operations management. Though for-profit companies implemented it first many other organizations use it now.

A BSC is widely popular in the US, Japan, the UK, and other parts of Europe. The balanced scorecard approach depends on quantifiable data collected which the managers and executives interpret both internally and externally to ensure better performance, good financial results, and customer satisfaction.

Key Takeaways

  • A balanced scorecard is a strategy metric that helps organizations identify problems and improve on them to deliver more reliable and better performance both internally and externally.
  • David Norton and Robert Kaplan first introduced it in 1992. It focuses on four perspectives – business processes, customers, learning and growth, and finance.
  • It is a consolidated report with all the collection, processing, and detailing of data that becomes meaningful information for companies to follow and adapt in the future.
  • A good BSC can help organizations achieve growth and long-term goals with effective strategies, communication, knowledge, and operations.

Balanced Scorecard Framework Explained

Balanced Scorecard Features

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The balanced scorecard was introduced in 1992 by Robert Kaplan and David Norton when they studied records, management style, operational methods, and reports and interpreted the data to develop critical factors to focus on in the future. Organizations related to business, industry, government, etc. use them extensively now. Experts believe it is also one of the most effective global management tools.

balanced scorecard model is not just the processing of data; it signifies the importance of management and teams implementing the right strategies and applications in the workspace. It is more than just a scorecard comparing KPIs (Key Performance IndicatorsKey Performance IndicatorsKey performance indicators (KPIs) help a company evaluate its overall business performance against the set goals over a period. These can differ depending on the types of firm or industry and the assessment criteria. Also, most firms employ these indicators to stay ahead of the competition.read more). A BSC adds value and plays a key role in establishing a clear vision for the company. It also aids the communication network within an organization and helps the management prioritize its goals and projects. BSC also makes monitoring easy as the organization can observe its path to progress.

The BSC framework helps define strategic objectives that an organization can implement step by step to attain organizational goals. A BSC helps a company grow internally and externally with better customer services, product quality, and internal management development. It aids in finding critical success factors and points out why the organization has been experiencing failure repetitively.

The balanced scorecard approach sets goals, makes action plans, and starts with its initiatives. Then, a BSC chooses indicators to monitor and gauge performance based on different factors. These factors are company growth, long-term objectives, and figures that a company expects to achieve. (with the help of good management and operational activitiesOperational ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more, improved performance, etc.)

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Examples

Example #1

Jacob runs a gaming store. He has all the knowledge about the latest games but has not been paying attention to growing his business. Hence, he was slowly losing all his customers- from children to adult gaming lovers. So he prepares a questionnaire and distributes it among his remaining customers and people outside his shop to understand the problem.

Accordingly, after people reply to the questions, he collects the questionnaire and processes the data. He finds out that many customers have complained that the store is not open most of the time, and the pricing is high, even for small games.

This questionnaire and its processed data serve the purpose of a balanced scorecard example. Now, once Jacob knows the issues, he addresses them, keeping the shop open for extra hours and cutting down the price of some good games. Jacob even runs a discount on other products. Soon, the business starts to become steady, and he is earning more profit than before.

Example #2

Take a look at another balanced scorecard example. The Waxahachie ISD Board of Trustees has conducted a presentation on its Balanced Scorecard initiative. Correspondingly, the BSC has comprised its four priorities – financial outcomes, supporting staff, growth, and customer outcomes. The scorecard has also directed their performance objectives. In addition, it also contained seven interview questions that the WISD added to the district’s core values. As a result, there was the relegation of students to the Waxahachie Civic Center, the organization of staff members, and the processing of students and teachers.

Benefits/Advantages

Here are the main benefits of a BSC:

  • As the first step, a balanced scorecard helps identify the errors and mistakes, and problems that go unrealized. As a result, every management has room for improvement, and improvement starts by identifying the issues.
  • No organization can run without effective planning, and a balanced scorecard help creates a better strategic plan for business activities and operations. Not only that, but it provides a well-devised blueprint for the organization to follow.
  • One of the key benefits of the balanced scorecard is that it invokes better internal and external communication and understanding in an organization.
  • It helps make adjustments and align projects in schedule with time, saving a lot of money and other resources for the company.
  • A BSC creates an improvement system of effective processing and hierarchy management between teams so that they can regulate commands to work efficiently and effectively.
  • It takes care of all the project’s vision, strategy, and accomplishment.
  • Makes the flow of information, data collection, and processing better.

Disadvantages

  • A BSC solely focuses on four perspectives which technically indicate that it skips on other catalysts and keeps many factors constant.
  • A balanced scorecard remains the same from example to example, which may become misleading and unreliable sometimes.
  • It is majorly based on KPIs, and at times, it becomes challenging to maintain them at every level for project coordination and achievement.
  • It is a good visual strategy but won’t work without proper implementation and a cultural shift in the work environment.
  • The BSC framework is complex, and sometimes when asked to prepare from external resources, it becomes hard to cope with the results.

Frequently Asked Questions (FAQs)

What is meant by a balanced scorecard?

It is a management performance metric to aid organizations in identifying and improving internal operations to bring better external outcomes. This metric strategically accounts for a company’s past performance data with feedback to make better organizational decisions in the future. A balanced scorecard example can be given by a customer survey form that helps companies understands the customer’s perspective from the answers collected in the questionnaire.

What are the four perspectives of a balanced scorecard?

The main four perspectives of a balanced scorecard approach are –

– Financial
– Customer
– Internal Process
– Learning and Growth.

What is a balanced scorecard example?

A balanced scorecard model can be understood as a scorecard for companies to analyze the present performance, detect the mistakes and rectify them. In addition, this scorecard help managements realize how they are performing and what can be done to elevate employees’ performance, operations, and the company. An example can be given by big companies who hire external firms specializing in providing such reports for a fee.

This article has been a guide to the Balanced Scorecard and its meaning. Here we discuss its advantages and disadvantages along with balanced scorecard examples. You can learn more from the following articles –

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