The Balanced Scorecard

“What you measure is what you get” (Kaplan & Norton, 1992)

ABSTRACTThis document examines the Balanced Scorecard Model within Strategic Management, examines each perspective, discusses its implementation and finally looks at its limitations and the new modern approach to the model.

RYAN ALILECHE – G00260743Strategic Management 2

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Student Name: Ryan Alileche

Student Number: G00260743

Programme: Business (Hons) Economics & Finance

Year: 4

Module: Strategic Management 2

Lecturer: Kevin McDonnagh

Assignment Title: CA4

Due Date: 22th April 2016

Date Submitted: 22th April 2016

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Executive SummaryThis document examines the Balanced Scorecard Model within Strategic Management,

examines each perspective, discusses its implementation and finally looks at its limitations

and the new modern approach to the model.

Introduction

The Financial performance of an organisation is inherently linked to its strategic

performance, therefore utilising a performance measurement system that strikes a balance

between an organisations financial objectives and strategic objectives is crucial. By only

monitoring financial objectives and performances this overlooks the fact that what ultimately

enables an organisation to deliver better financial results is the achievement of strategic

objectives that improve its competitiveness and market strength. (Thompson, et al., 2012)

The most commonly used framework for balancing financial objectives with strategic

objectives is the Balanced Scorecard. This is method for linking financial performance

objectives to specific strategic objectives that derive from an organisations business model. It

provides employees with clear guidelines about how their jobs are linked to the overall

success of a company so that they can contribute most productively and in cohesion for the

achievement of these goals. (Thompson, et al., 2012)

The Balanced Scorecard is not a way of formulating strategy. It is a way of

understanding and checking what you have to do throughout an

organisation to make a strategy work. (Lynch, 2000)

Richard Lynch says the four main principles behind the scorecard are;

1. Translating the vision – Trough clarifying and gaining consensus

2. Communicating and linking – through setting goals and establishing rewards for

success

3. Business Planning – To align objectives, allocate resources and establish milestones

4. Feedback and learning- To review the subsequent performance against the plan

(Lynch, 2000)

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The Balanced Scorecard

The Balanced Scorecard is a strategic performance management tool developed by Dr.

Robert Kaplan, of the Harvard Business School, and Dr. David Norton, an international

strategy consultant for Renaissance Solutions Inc. Together they first introduced the

methodology in 1992 in an article published in the Harvard Business Review. They examined

the most successful businesses across the world and found similarities in the way they were

run. (Kaplan & Norton, 1992)

Kaplan and Norton observed that each of the top performing businesses had a very clear

vision and strategy that was managed across the areas of Finance, Customer, Internal

Processes and Knowledge & Growth. Together they recognised this structure as the balanced

scorecard, creating perspectives based on these areas thus providing a balance based on these

financial and non-financial measures. (Kaplan & Norton, 1992)

“What you measure is what you get” (Kaplan & Norton, 1992)

The Financial Perspective looks at top level financial objectives and measures to establish

how well the company is performing in the eyes of their shareholders. The Customer

Perspective looks how the customer views the company. The internal Processes section looks

at how well the business is running and whether it provides what the customer wants most.

Knowledge & growth looks at the workers within the company, the skills and competencies

they have and how they can improve and create value to the business. (Kaplan & Norton,

1992)

These perspectives outline the organisations vision and strategy and enable the creation of a

strategy map, which is the company strategy stated in simple terms, in an easy to follow

arrangement, built around the four perspectives from the balanced scorecard.

Within these perspectives is the establishment of a small number of strategic objectives,

targets and goals are then set to achieve each objective then they are measured regularly to

determine whether they are being met or not. (IntrafocusUK, 2012)

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The Financial Perspective

This perspective asks - how do we look to our shareholders? It examines if the company’s

strategy will contribute to the bottom-line improvement of the company. This perspective

represents the long-term strategic objectives of the business and thus it incorporates the

tangible outcomes of the strategy in traditional financial terms. Kaplan and Norton say that

timely and accurate finance data will always be needed and provided by managers. (Kaplan

& Norton, 1992)

Companies will examine their profit, earnings per share (EPS), share price, return on

investment (ROI) and return on equity. These are common measures of financial performance

that companies will use to determine how the company did and in turn how well the

managers and employees performed. High profits indicate the company is doing well and can

have a positive effect on investor confidence

Financial measures are a vital element of the Balanced Scorecard, particularly in a for-profit

organisation. The goals and measures in this perspective tell us whether the strategy

executed, which is established through objectives and measures chosen in the other

perspectives, is leading to better bottom line results. (Niven, 2006)

An example of an organisations financial objectives would be to endure, succeed and

flourish. They ensure they endure by measuring cash flow, they succeed by measuring

monthly sales and flourish by increasing market share and return on investment.

A problem with only using financial measures include short sightedness. How this occurs is

when companies focus too much on profits and trying to influence share price in a short space

of time instead of looking at a long term position.

Another problem is that this perspective is very top focussed. For example a worker pushing

trolleys or sweeping floors in Tesco isn’t going to be concerned or incentivised with earnings

per share or ROI because their job is so removed from that aspect so they are likely to feel

their actions have no effect on it, only the top people in a company can really be effected or

can influence these measures. If you are the C.E.O of a company then the buck stops with

you when it comes to profits because you’re decisions directly affect share price, profits etc.

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The Customer Perspective

Many companies today have corporate missions that focus on customers. “Every Little

Helps” for example is the slogan for Tesco which is directed to providing as many little

savings as possible on to customers. How a company performs from the point of view of its

customers has become a top priority for senior management (Kaplan & Norton, 1992)

This perspective looks to emphasize the need to satisfy the needs and wants of customers.

This perspective places an importance in customer focus and satisfaction. It is of the belief

that if customers are not satisfied then they will eventually find other suppliers that will meet

their demands. Poor performance in this aspect is a leading indicator of future decline, even

in times of high profits.

Purpose needs to be seen in the context of customer-orientate strategy. This should not

include only market share data but also areas such as customer retention, customer

profitability measures and customer satisfaction. (Lynch, 2000)

To measure the aspect of customer service a company might measure delivery times and look

to compare them with leading competitors. If they are slower then this is an area of concern

and the company should look to improve on it. Obviously if they are faster than this is a

competitive advantage that should look to maintain. (Johnson & Scholes, 2002)

An example would be if a business strategy highlights the need for introducing a new

product, then the scorecard might go beyond sales and market share data to explore customer

satisfaction and repeat business.

The Internal Processes Perspective

This perspective looks at how well a business runs and whether it’s providing the products

that the customer actually wants. It’s concerned with internal performance measures related

to productivity, capital investment against cost savings achieved, labour productivity

improvements and other factors that will indicate way in which a company is undertaking the

strategy inside a company. This can involve setting internal strategy targets and establishing

milestones for the implementation of strategy (Lynch, 2000)

Kaplan & Norton says that customer based measures are important, however they must be

translated into measures of what the company must do to meet its customers’ expectations.

Excellent customer performance derives from processes, decisions and actions occurring

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throughout an organisation. Managers need to focus on these critical internal operations to

enable them to satisfy the needs of a customer. (Kaplan & Norton, 1992)

The internal measures for the balanced scorecard should stem from the business processes

that have the highest impact on customer satisfaction such as aspects that affect cycle time,

quality, employee skills and productivity. Businesses should also endeavour to identify and

measure their core competencies and the critical technologies necessary to ensure market

leadership. (Kaplan & Norton, 1992)

For example, the creation of a new website will improve not only the customer satisfaction

aspect but also include registering of the web page, design of the site and also the

maintenance of the site. Each of these elements can have specified target dates and costs.

To assess the quality of workers and its processes a scorecard measure would be to measure

training & development, job turnover, product quality and stock turnover. (Lynch, 2000)

The Knowledge & Growth Perspective

This perspective, also known as the innovation and learning perspective, looks to provide

feedback and learning through strategy reviews and sharing comments on the outcome of

events. It has the effect of highlighting the importance of communicating and linking people

with the purpose through education, goal setting and rewards for achieving the required

performance. It consists of employee training and corporate cultural attitudes linked to both

individual and corporate self-improvement.

(Lynch, 2000)

The Knowledge and Growth Perspective identifies the infrastructure that the company must

construct to generate long term growth and improvement. Organisations learning and growth

can come from 3 principle sources: People, Systems and Organisational Procedures. (Kaplan

& Norton, 1996)

People can learn and grow through adequate training policies which can help them to become

a more valuable asset to the business. Systems must be constantly updated and maintained to

enable a business to stay ahead of its competitors. Organisational procedures can scrutinise

alignment of employee incentives with general organisational success factors, and measured

rates of development in critical customer-based internal processes. Keeping systems current

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and employees well trained adds extra costs however the end product is a more streamlined

company that is more capable of achieving its goals. (Kaplan & Norton, 1996)

These perspectives outline the organisations vision and strategy and enable the creation of a

strategy map, which is the company strategy stated in simple terms, in an easy to follow

arrangement, built around the four perspectives from the balanced scorecard.

Within these perspectives is the establishment of a small number of strategic objectives,

targets and goals are then set to achieve each objective then they are measured regularly to

determine whether they are being met or not. (IntrafocusUK, 2012)

Leading and Lagging Metrics

Measurement is done through Performance Measures. These are usually a small number of

these measures which are easily understood and can be acted on immediately. Performance

measures must be both leading and lagging. Poorly run businesses generally focus on lagging

indicators which can’t be influenced as the event that effects it has already has already

occurred, an example would be the number of sick days being taken or unit production. A

leading indicator is seen as the precursor to an event and as a result cannot be immediately

influenced, to do so requires a period of time ranging from anywhere from 3 months to 3

years. (Kaplan & Norton, 1992)

Implementation of the Balanced Scorecard

The Balanced Scorecard is not a to-do list, one-time effort, shopping list, complete analysis

or even a roadmap to the future. A well-crafted scorecard reflects the company’s vision,

simplifies and communicates the vision, delivers a quick and complete idea of the company’s

health.

In crafting a Balanced Scorecard, a company must define a small number of goals for each

perspective, select indicators for each goal, construct the metrics by which performance is to

be measured, and then follow up by collecting data and assessing results.

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Goals should be reflective of what the company wants to achieve in line with its vision.

Indicators should be comprehensive, flexible and should allow for innovation and variety. It

should be easy and straight forward to assess results to determine whether or not the company

is achieving its goals.

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Kenya Red Cross

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The Red Cross in Kenya use the Balanced Scorecard. They use clearly defined goals,

measure their performance through a percentage ranking for completion and state what needs

to be done to meet each target or sustain it. (Kenya Red Cross Society, 2016)

The Limitations and Modern Take on the Model

The Balanced Scorecard provided a major breakthrough in assessing company performance,

however, limitations in the model have been discovered. Atkins, Waterhouse and Wells argue

that the model fails to sufficiently highlight the contributions that staffs and suppliers give to

help the business accomplish its goals, Recognise the role of the community in outlining the

environment within which the business works and finally identify that performance

measurement as a two-way procedure, which allows management to measure investors’

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contributions to the business’s primary and secondary goals and allows investors to evaluate

whether the business is capable of accomplishing its duties to them both present and in the

future. (Atkinson, Waterhouse, & Wells, 1997)

It’s also been argued that the original model doesn’t factor in the importance of HRM and

that the lack of focus on this aspect can be seen as a significant weakness given its

importance in today’s business environment. (Johnson & Scholes, 2002)

Over the years the scorecard has been modified to make it more relevant to today’s business

environment. There are a number of important aspects that aren’t looked at such as

regulators, suppliers, environmental and competitor aspects. To solve this many businesses

will simply add these new perspectives to their own scorecard. (Marr, 2016)

StatoilHydro, an oil and gas company added a Health, Environment and Safety perspective to

their scorecards to reflect their own strategic needs. The company has used the model since

the mid-90s and utilises it companywide from corporate level to departmental and team

levels. (Marr, 2016)

Conclusion

The Balanced Scorecard represents nothing new. Educating, acquiring feedback, setting goals

and targets have been around for a long time. As Norton points out, the danger of the

scorecard is that it places a strong emphasis on measuring performance, which might not be

what is important strategically, and not on gaining commitment and action. The scorecard can

lead to too much measurement in larger companies which can become a big issue. (Kaplan &

Norton, 1992)

However the scorecard can be a success as it enables a business to translate a vision into

practical and useful targets & measures and moving strategy beyond overly simple measures

like ROI and Earnings per Share.

The Balanced Scorecard has become a valuable tool to ensure alignment through strategy

maps, improved communications and ultimately lead to a better performing organisation that

is in tune with its business strategy

Bibliography

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Atkinson, A. A., Waterhouse, J. H., & Wells, R. B. (1997). A Stakeholder Approach to

Strategic Performance Measurement. MIT Sloan Management Review.

IntrafocusUK. (2012, August 9th). Balanced Scorecard. Retrieved from youtube.com:

https://www.youtube.com/watch?v=M_IlOlywryw

Johnson, G., & Scholes, K. (2002). Exploring Corporate Strategy. Harlow: Pearson

Education Ltd.

Kaplan, & Norton. (1992). The Balanced Scorecard - Measures That Drive Success. Harvard

Business Review.

Kaplan, R., & Norton, D. (1996). Linking the Balanced Scorecard to Strategy. Calafornia

Management Review, 53-70.

Kenya Red Cross Society. (2016, April 20th). Kenya Red Cross Balanced Scorecard.

Retrieved from balancedscorecard.org:

https://balancedscorecard.org/Portals/0/PDF/KenyaRed%20CrossScorecardPoster.pdf

Lynch, R. (2000). Corporate Strategy. London: Pearson Education Ltd.

Niven, P. R. (2006). Balanced Scorecard Step-by-Step: Maximizing Performance and

Maintaining Results. New Jersey: Wiley.

Thompson, Strickland, Gamble, Peteraf, Janes, & Sutton. (2012). Crafting and Executing

Strategy: The Quest For Competitive Advantage . London: McGraw-Hill Irwin.

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