AFM/U3 Topic 7 Balanced Scorecard
What is a BSC for?
A BSC is a strategy execution tool that, at the most basic level, helps companies to:
Clarify strategy – articulate and communicate their business priorities and objectives
Monitor progress – measure to what extent the priorities and strategic objectives are being delivered
Define and manage action plans – ensure activities and initiatives are in place to deliver the priorities and strategic objectives.
Developed by Robert Kaplan and David Norton, the Balanced Scorecard is an extremely influential management tool that remains enduringly popular with companies around the world. At its most basic level, the Balanced Scorecard helps organisations to clarify their strategy and communicate the business’s top strategic priorities and objectives.
If you’ve ever seen the Balanced Scorecard in action, you’ll know it’s essentially a strategic framework, divided into four areas (called “perspectives”) that are critical to business success. In this article, we’ll look at each of the perspectives in more detail, and see how these perspectives can be tailored and tweaked to suit your company’s circumstances.
The Financial perspective
For most for-profit organisations, money comes up tops. (We’ll get to non-profits later in the article.) Therefore, the very top perspective is all about financial objectives.
Essentially, any key objective that is related to the company’s financial health and performance may be included in this perspective. Revenue and profit are obvious objectives that most organisations list in this perspective. Other financial objectives might include:
Cost savings and efficiencies (for example, a specific goal to reduce production costs by 10% by 2020)
Profit Margins (increasing operating profit margins, for instance)
Revenue sources (for example, adding new revenue channels)
The Customer perspective
This perspective focuses on performance objectives that are related to customers and the market. In other words, if you’re going to achieve your financial objectives, what exactly do you need to deliver in terms of your customers and market(s)?
Included in this perspective you might find objectives for:
Customer service and satisfaction (increasing net promoter scores, or reducing call centre waiting times, for example)
Market share (such as, growing market share in a certain segment or country)
Brand awareness (for example, increasing interactions on social media)
The Internal Process perspective
What processes do you need to put in place to deliver your customer- and finance-related objectives? That’s the question this perspective aims to answer. Here you would set out any internal operational goals and objectives – or, in other words, what does the business need to have in place and what does the business need to do well in order to drive performance?
Examples of internal process objectives might include:
Process improvements (for example, streamlining an internal approval process)
Quality optimisation (such as, reducing manufacturing waste)
Capacity utilisation (using technology to boost efficiency, for instance)
The Learning and Growth perspective
While the third perspective is about the concrete process side of things, this final perspective considers the more intangible drivers of performance. Because it covers such a broad spectrum, this perspective is often broken down into the following components:
Human capital – skills, talent and knowledge (for example, skills assessments, performance management scores, training effectiveness)
Information capital – databases, information systems, networks and technology infrastructure (such as, safety systems, data protection systems, infrastructure investments)
Organisational capital – culture, leadership, employee alignment, teamwork and knowledge management (for example, staff engagement, employee net promoter score, corporate culture audits)
7 BENEFITS OF BALANCE SCORECARD
- Better Strategic Planning
The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which helps managers to think about cause-and-effect relationships between the different strategic objectives. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy.
- Improved Strategy Communication & Execution
Having a one-page picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This ‘plan on a page’ facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy which they don’t fully understand.
- Better Alignment of Projects and Initiatives
The Balanced Scorecard help organisations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.
- Better Management Information
The Balanced Scorecard approach helps organisations design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.
- Improved Performance Reporting
The Balanced Scorecard can be used to guide the design of performance reports and dashboards. This ensures that the management reporting focuses on the most important strategic issues and helps companies monitor the execution of their plan.
- Better Organisational Alignment
The Balanced Scorecard enables companies to better align their organisational structure with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business units and support functions are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations.
- Better Process Alignment
Well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.