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What is Balanced Scorecard – Different Stages For Development & Why is it Implemented

Updated on:  

08 min read

Entering into and running a business has always been a risky affair. Just overnight a business may be valued at millions of rupees or easily find themselves among one of the 9 in 10 start-ups that fail. Even well-established running businesses do not have it easy – Nokia and Blackberry being prime examples. There are just too many variables to take into account. The age old thinking of “the higher you invest, the greater are your returns”; simply does not work anymore. There is no sure-fire way to be successful. Balanced Scorecard helps connecting the scattered dots in an organization for an analysis to achieve targets!

What were the Stages for the development of Balanced Scorecard?

The Balanced Scorecard has gone through various stages of development. Robert S. Kaplan and David P. Norton are usually associated with the concept of Balanced Scorecard since they published a paper on this topic in 1992 and 1993 which grew in popularity and further also published a book in 1996. According to them, the Company must ask itself the following 4 questions which ultimately form the balanced scorecard:

  • To succeed financially, how should we appear to our shareholders?
  • To achieve our vision, how should we appear to our customers?
  • To achieve our vision, how will we sustain our ability to change and improve?
  • To satisfy our shareholders and customers, what business processes must we excel at?

Thus the 4 perspectives covered in the above questions are: the financial perspective, the customer perspective, the internal business perspective and the learning and growth perspective. An illustrative set of ideal metrics for each of the perspectives are given below:

  • Financial perspective: Sales/Return on Capital Employed/Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA)
  • Customer perspective: Measures of price, Delivery Time, Warranty period, Call time for support, etc.
  • Internal business perspective: Efficiency in output, number of defects in a process, sales penetration,
  • Learning and growth perspective: Measures of technology, cost leadership

The first generation of the Balanced Scorecard covered the above 4 perspectives. The second generation included one major improvement and a key step to implement the balanced scorecard: Strategy Mapping.

Strategy Mapping refers to drawing out an action plan to achieve the organisational objectives/strategy. The above 4 perspectives are linked together with their respective action plans – how the entity intends to achieve the best financial growth, customer satisfaction, innovate and smoothen the running of the business internally. The third generation, however, gave a vision of what the end-result of such a strategy would be and this was called a Destination Statement.

The Destination Statement helps in getting an idea of what impact the strategy or goals would have on the organisation if it were actually achieved.

Why is Balanced Scorecard implemented?

PerspectiveObjectivePerformance measure
FinancialTo achieve short-term gains To achieve long-term stability in performanceEarnings Before Interest, Taxes, Depreciation and Amortisation Leverage Analysis like Debt-Equity Ratio Revenue earned per room
CustomerFocus on improving the experience of existing customers Expand reach and try to target new customersNumber of repeat customers Number of new customers Feedback forms filled by customers Number of complaints received from customers with regards to service
Internal businessReduce waiting time for customers Reduce food shortages of popular dishesService rating of the hotel on popular websites Staff hours per guest Rating of food and reviews on blogs
Learning and GrowthTo have qualified staff able to deal with most service requests that customers have To make the workspace more friendly for employees Adding new range of servicesNo. of staff training days Employee turnover/ retention No. of new schemes launched

What are the setbacks of the Balanced Scorecard Idea?

Balanced Scorecard is one of the most influential business ideas of the past 75 years and reputed brands like Volkswagen, Citibank, Philips, Thomas Reuters, Apple, etc. have been known to adopt the same. However, the Balanced Scorecard still has a few setbacks highlighted as below:

  • While setting targets or objectives, the top management must ensure that an harmony exists at all levels of the lower management. The belief, support and commitment of the lower management is necessary if the top management wants them to be a part of the implementation. This might be difficult to obtain since every manager might have his own opinion on what is successful and what is not at his level and the ultimately the big picture might be lost.
  • It provides only a set of questions that may help in implementing the strategy and measuring its performance but formulating the strategy is still fully dependent on top management.
  • Managers sometimes feel that the Balanced Scorecard only measures non-financial factors which they are already doing through other management techniques and hence they might not give this techniques that much importance as they do for others.
  • The 4 perspectives covered in the Balanced Scorecard may not be the optimum factors to look at. Some experts believe that there might be a bias towards the financial perspective and profit could end up being the ultimate focus. However, there are a few other factors that should also be given more attention like Human Resource, political climate, competition awareness, etc.

Every business needs to be constantly scanning its environment and adapting itself accordingly. In this technology-driven era, investing in intangibles is as important as investing in tangible assets. The customer’s opinion of the company could in itself be an asset if handled appropriately. There are many tools out there to analyse the quantitative aspects of the performance of an entity. However, the Balanced Scorecard is a strategic planning and management tool that lets managers keep track of the organisation’s progress keeping in mind the set goals and also measure its financial and non-financial performance.

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