Balanced scorecard: connecting the performance measures

Revision as of 21:29, 9 April 2023

Performance indicators help companies/organizations to assess and make improvements to increase the feasibility of success and overall continuation of satisfactory operations. Tangible assets can be easily measured through financial accounting, such as profit margins, and therefore it’s easy to differentiate between if the company is successful or unsuccessful. However, With the constant change in the market, intangible assets have become as important as tangible ones, such as customer satisfaction, the efficiency of services, reputation, etc. To increase accessibility for top managers and provide important information relevant to the company through indicators, Robert S. Kaplan and David P. Norton researched different companies. They came up with the “Balanced scorecard”, which is a systematic approach to align goals to strategy. This approach also gives managers an overview of these indicators and how each one of them connects to each other from 4 different perspectives: Financial, Customer, Internal and Innovation, and Learning. By visualizing these perspectives in the form of a balanced scorecard, a connection can be made between them, and increasing/decreasing one indicator will in turn affect other indicators. Having an overview of these indicators, companies can adjust their operations to align with their current goals or create new goals with the help of the indicators. Despite this, limitations are still in place, such as managers resistance to change, time and cost-heavy data acquisition, and misinterpretation of indicators that are presented.

Big idea

Origins and purpose

The Balanced scorecard was first introduced in the year 1992 by Robert Kaplan and David Norton after they had conducted a study on companies regarding performance measurement ^[1]. Companies at the time measured their performances mostly through financial indicators, but as the world of business was exponentially growing the demand for a more detailed measurement was needed. To satisfy this demand, Kaplan and Norton presented a solution in the form of a scorecard that took in consideration 4 perspectives that would help the company’s strategy to come into fruition. Each of these perspective focus on different dimensions of the business spectrum and are divided into the following:

• Financial
• Customer
• Internal
• Innovation and learning

Perspectives and the importance of connection

• Go in more detail about the role of each perspective in the scorecard
• talk about how the perspectives works together.
• show the importance of not neglecting the indicators

Financial

For organizations to thrive in the landscape of business, the most easily identified factor is the financial one. Financial performance indicators can be measured and put in a straight forward way that represents the organizations ability to gain revenue, for instance profit margins, rate on investment, cash flows and more.

Customer

As the business landscapes expands and evolves, so does the important of how external factors impact how business is concluded. Customers are a key external factor on how an organization functions since they are the ones that provide revenue. Customer satisfaction can impact a brands image which in turn can lead to either negative or positive effect, depending on the situation. Measuring this performance indicator can be in the form of surveys sent out to customers, complaints received and more. In short, this perspective focuses on how the organization appeals to the customers (1)

Internal

Processes that the organization has to be proficient at to add value for shareholders and customers are identified as internal processes (3). By identifying, measuring and evaluating these processes, organizations can increase their value in different ways, such as better customer satisfaction, decreased cost due to optimized setups, supplier relationship and more. When focusing on this perspective, one has to keep in mind that these attributes are supposed to indicate what must the organization excel at to have a competitive edge.

Innovation and learning

Application

Real-life example

• Talk about a study performed on the use of the scorecards in regards to a Brazilian company ^[2]

Limitations

Resistance to change

• Touch upon different reasons on why managers could be resistant to change
• Review what could be done to prevent or lower the uncertainty^[3]

misinterpretation

Misinterpretation As with a lot of methods/tools, correct definition of the use and purpose of it is vital to prevent misinterpretation which could lead to the results being disadvantageous to company’s goals. Results from the measurement of intangible performance indicators, such as employee morale or reputation, leaves a lot of room for misdiagnosis of the current state. The cause of this is that opinions on intangible is often subjective since it’s difficult for us as a human being to agree on intangible results. Let’s take employee knowledge as an example, if I would ask two different individuals to give assessment of the knowledge from employees at the company, there is a high possibility that the answers will differ. As with most methods, having a lack of knowledge or an agreement on the purpose of them can lead to misalignment of goals which in turn leads to misinterpretation results. A way to prevent this is to from the start inform everyone involved the balanced scorecard about the what and why, what are we measuring and why are we measuring it^[4] . Then there’s the issue of deciding how the measurement should be implemented, processed and the reviewed (as stated earlier in this section). The choice of method for measuring intangible performance indicators has to be decided at the earliest, be it a survey, interview or something entirely different.

References

1. ↑ Kaplan, R. S. & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 71–80.
2. ↑ Dias Jordao, R. V., & Casas Novas, J. (2013). A Study on the Use of the Balanced Scorecard for Strategy Implementation in a Large Brazilian Mixed Economy Company. In Journal of technology management & innovation (Vol. 8, Issue 3, pp. 17–18). SciELO Agencia Nacional de Investigacion y Desarrollo (ANID). https://doi.org/10.4067/s0718-27242013000400009.
3. ↑ Niven, P. R. (2010). Balanced Scorecard Step-by-Step (2nd ed.). Wiley.
4. ↑ Cokins, G. (2009). Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (1st ed.). Wiley.