BALANCED SCORECARD

Balanced Scorecard

Balanced Scorecard

What is the Balanced Scorecard?

The seminal article, 'The Balanced Scorecard - Measures that Drive Performance' by R. Kaplan & D. Norton, 1992, clearly demonstrates the theory and implementation of BSC. The system is comprised of both financial and operational measures that are derived from a company's strategic objectives. Effective measurement is thus the key component for motivating breakthrough improvements in critical areas (Henderson, 2006).

The "Scorecard" in BSC refers to a means of recording and communicating performance and results. "Balanced" refers to balance among measures, performance indicators, outcome and output measures, horizontal measures and vertical accountability. The framework is designed to improve results via development of high priority actions and resources that compliment the overall company strategy. It is therefore a mechanism to drive change by measurement of future orientated strategies with aggressive goals for improvement. Performance measures are utilised to track organisational performance on a daily bases (Meyer, 2002). The four perspectives addressed in this measurement system are:

Financial (e.g., profit margins return on assets, cash flow). Customer (e.g., market share, customer satisfaction index). Internal Business (e.g., employee retention, cycle time reduction). Innovation and Learning (e.g., percentage of sales from new products).

The primary components of the BSC system that contribute to its success are define as the four perspectives and requiring managers to select a limited number of critical indicators, the BSC clarifies the company's strategy and fosters continuous measures for achievement of the established goals (Langfield, 2003).

Financial Perspective

The financial performance measures indicate the company's profitability and growth. Historically this measure has been of great importance in determining an organisation's worth. While it is a very important aspect of a company's success, relying on financial control systems alone can be detrimental to the company's long term success. If the only goal of the organisation is measured by cash flow, quarterly sales growth, and increased market share, the company may resort to the sacrifice of quality and service in an attempt to cut costs and increase immediate sales. While this strategy may be effective short-term, the long-term implications are irrevocably detrimental as customer satisfaction and future sales plummet (Mooraj, 1999).

Customer Perspective

Financial performance measures, however, are not the only measure of importance to a company's success and, in fact, can be detrimental to the organisation's long-term success if overemphasised. For this reason, it is only one of the four perspectives to be considered in the BSC system. Another ...