Balanced scorecard: connecting the performance measures
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| − | 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 | + | 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 organization 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 organization through indicators, Robert S. Kaplan and David P. Norton researched different organizations. 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, organizations 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, incorrect emphasis, and misinterpretation of indicators that are presented. |
== Big idea == | == Big idea == | ||
=== Origins and purpose === | === 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 | + | The Balanced scorecard was first introduced in the year 1992 by Robert Kaplan and David Norton after they had conducted a study on organizations regarding performance measurement <ref name="Kaplan"> Kaplan, R. S. & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 71–80. </ref>. Organizations at the time almost entirely measured their performances 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 organizations strategic goals to come into fruition. Each of these perspectives focus on different dimensions of the business spectrum and are divided into the following: |
*Financial | *Financial | ||
*Customer | *Customer | ||
*Internal | *Internal | ||
*Innovation and learning | *Innovation and learning | ||
| + | |||
| + | Balanced scorecards can help organizations identify new potential areas of improvement through the measured indicators within these perspectives. This is supported by the fact that managers can take decisions that are backed by data and therefore decide to improve in areas that are lacking within the organization. | ||
| + | |||
| + | The goal of these perspectives was to provide measurements that would align with strategic goals that organizations had set for themselves <ref name="Kaplan"> Kaplan, R. S. & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 71–80. </ref>. Having a clear vision to reach a certain goal is important in the competitive landscape. So, one can make a claim that having a tool such as the balanced scorecard would be a helpful tool in obtaining a said goal. As the saying goes, "knowledge is power" and the balanced scorecard can give valuable insights into organizations performance and give them a chance to make informed decisions based on data obtained from the scorecards. This knowledge enables organizations to adapt their strategies if new trends emerge in the market, which helps them be relevant and competitive with rival organizations. | ||
| + | |||
| + | Though the original version of the Balanced scorecards is still used by businesses today, other types of them have been proposed to fit a certain narrative. One example is the suggestion of adding social and environmental aspects to the scorecards <ref name="Unbalanced"> Brignal, S. (2002). . The Unbalanced Scorecard: a Social and Environmental Critique". Proceedings, Third International Conference on Performance Measurement and Management (PMA2002). </ref>.This can be really helpful in our socio-economic landscape, especially since awareness regarding our impact on sustainability and environmental impact has increased immensely in the last couple of years. Though it might not have been the intention of Kaplan and Norton, the format of the framework leaves room for new perspectives to be added. One thing to keep in mind is to make sure that that aspect will add value to the company's strategic goal. | ||
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| + | |||
=== Perspectives and the importance of connection === | === Perspectives and the importance of connection === | ||
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==== Financial ==== | ==== Financial ==== | ||
| − | + | The most well-known and the most normally measured perspective is the financial perspective since in order for organizations to thrive in the competitive business landscape and ensure long-term success, financial stability is important. Managers should though be aware that short-term financial measurements can be misleading to the overall picture, such as quarterly sales <ref name="Kaplan"> Kaplan, R. S. & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 71–80. </ref>. Financial performance indicators can be measured and put in a straightforward way that represents the organizations ability to gain revenue. Measuring financial performance indicators can be done in a number of ways. One of those indicators is net profit margin, which is a percentage of a organizations net income, divided by its net sales. Another one is organizations return on investment (ROI) which is the value of an investment, divided by its cost. There are of course more indicators such as cash flows. Back in the day, these metrics were the only measures of success for organizations, since profit was the main driving factor for organizations. Now a days other metrics have become as important as the financial gain since the landscape has drastically changed throughout recent years. | |
==== Customer ==== | ==== 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) | 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) | ||
Revision as of 10:15, 9 May 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 organization 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 organization through indicators, Robert S. Kaplan and David P. Norton researched different organizations. 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, organizations 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, incorrect emphasis, and misinterpretation of indicators that are presented.
Contents |
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 organizations regarding performance measurement [1]. Organizations at the time almost entirely measured their performances 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 organizations strategic goals to come into fruition. Each of these perspectives focus on different dimensions of the business spectrum and are divided into the following:
- Financial
- Customer
- Internal
- Innovation and learning
Balanced scorecards can help organizations identify new potential areas of improvement through the measured indicators within these perspectives. This is supported by the fact that managers can take decisions that are backed by data and therefore decide to improve in areas that are lacking within the organization.
The goal of these perspectives was to provide measurements that would align with strategic goals that organizations had set for themselves [1]. Having a clear vision to reach a certain goal is important in the competitive landscape. So, one can make a claim that having a tool such as the balanced scorecard would be a helpful tool in obtaining a said goal. As the saying goes, "knowledge is power" and the balanced scorecard can give valuable insights into organizations performance and give them a chance to make informed decisions based on data obtained from the scorecards. This knowledge enables organizations to adapt their strategies if new trends emerge in the market, which helps them be relevant and competitive with rival organizations.
Though the original version of the Balanced scorecards is still used by businesses today, other types of them have been proposed to fit a certain narrative. One example is the suggestion of adding social and environmental aspects to the scorecards [2].This can be really helpful in our socio-economic landscape, especially since awareness regarding our impact on sustainability and environmental impact has increased immensely in the last couple of years. Though it might not have been the intention of Kaplan and Norton, the format of the framework leaves room for new perspectives to be added. One thing to keep in mind is to make sure that that aspect will add value to the company's strategic goal.
Perspectives and the importance of connection
Financial
The most well-known and the most normally measured perspective is the financial perspective since in order for organizations to thrive in the competitive business landscape and ensure long-term success, financial stability is important. Managers should though be aware that short-term financial measurements can be misleading to the overall picture, such as quarterly sales [1]. Financial performance indicators can be measured and put in a straightforward way that represents the organizations ability to gain revenue. Measuring financial performance indicators can be done in a number of ways. One of those indicators is net profit margin, which is a percentage of a organizations net income, divided by its net sales. Another one is organizations return on investment (ROI) which is the value of an investment, divided by its cost. There are of course more indicators such as cash flows. Back in the day, these metrics were the only measures of success for organizations, since profit was the main driving factor for organizations. Now a days other metrics have become as important as the financial gain since the landscape has drastically changed throughout recent years.
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 [3]
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[4]
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[5] . 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
- ↑ 1.0 1.1 1.2 Kaplan, R. S. & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 71–80.
- ↑ Brignal, S. (2002). . The Unbalanced Scorecard: a Social and Environmental Critique". Proceedings, Third International Conference on Performance Measurement and Management (PMA2002).
- ↑ 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.
- ↑ Niven, P. R. (2010). Balanced Scorecard Step-by-Step (2nd ed.). Wiley.
- ↑ Cokins, G. (2009). Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (1st ed.). Wiley.
