Balanced Scorecard

What is a Balanced Scorecard?

The balanced scorecard (BSC) is a strategic planning and management system. Organizations use BSCs to:

The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance. The concept of balanced scorecard has evolved beyond the simple use of perspectives and it is now a holistic system for managing strategy. A key benefit of using a disciplined framework is that it gives organizations a way to “connect the dots” between the various components of strategic planning and management, meaning that there will be a visible connection between the projects and programs that people are working on, the measurements being used to track success (KPIs), the strategic objectives the organization is trying to accomplish, and the mission, vision, and strategy of the organization.

Who Uses the Balanced Scorecard (BSC)?

BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. More than half of major companies in the US, Europe, and Asia are using the BSC, with use growing in those areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard fifth on its top ten most widely used management tools around the world. BSC has also been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.

What Are Balanced Scorecard Perspectives?

BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. More than half of major companies in the US, Europe, and Asia are using the BSC, with use growing in those areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard fifth on its top ten most widely used management tools around the world. BSC has also been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.

The BSC suggests that we examine an organization from four different perspectives to help develop objectives, measures (KPIs), targets, and initiatives relative to those views.

What is a Strategy Map?

A strategy map is a simple graphic that shows a logical, cause-and-effect connection between strategic objectives (shown as ovals on the map). It is one of the most powerful elements in the balanced scorecard methodology, as it is used to quickly communicate how value is created by the organization.

How Does Strategy Mapping Help an Organization?

Strategy mapping can vastly improve any strategy communication effort. Most people are visual learners and so a picture of your strategy will be understood by many more employees than a written narrative. Plus the process of developing a strategy map forces the team to agree on what they are trying to accomplish in simple, easy-to-understand terms. With a well-designed strategy map, every employee can see how they contribute to the achievement of the organization’s objectives.

What Does a Strategy Map Look Like?

The example below demonstrates how a business might organize their strategic objectives across the four perspectives of the balanced scorecard. Arrows are used to illustrate the cause-and-effect relationship between the objectives. By following the path of the arrows, you can see how the objectives in the lower perspectives drive the success of the higher ones. These causal relationships are central to the idea of strategic planning and management with a balanced scorecard. If you Improve Knowledge and Skills and Improve Tools and Technology (in the Organizational Capacity perspective), you will more easily Increase Process Efficiency and Lower Cycle Time (in the Internal Process Perspective). If you do those things, you will more easily Lower Wait Time, and so on.

This example is a simple teaching example, but a real map will look the same. A typical strategy map will have four perspectives and between 12 and 18 strategic objectives. Like the example above, most for-profit companies put the financial perspective on top because their end goal is to make more money. For public sector organizations, however, finances are more of a means to an end. Since a government or nonprofit’s final goal is to provide the best services it can, it is common for them to switch the top perspectives so that Customer/Stakeholder is on top. Their funding and cost effectiveness (Financial Stewardship) allows them to drive mission-driven success.

How Do You Develop a Strategy Map?

Strategy Map development happens during Step Four of the Nine Steps to Success. At this point, the organization should have completed a full strategy assessment and developed high level strategy elements like Mission, Vision and Themes/Goals. The organization’s business model will help them choose the right perspective names and order. The mapping process begins when the organization identifies continuous improvement objectives needed to achieve its vision and goals. We recommend objectives that are simple, easy to understand, and that imply continuous improvement. Objectives are identified for all four perspectives and then cause-effect arrows are drawn to indicate the flow of value creation.

Who Develops the Strategy Map?

We highly recommend that cross-functional teams develop all elements of strategy, especially the strategy map. Inclusion in the development process expands the set of viewpoints informing strategy formulation and encourages buy in by the team members that will be responsible for executing the strategy.

What is Cascading?

Cascading a balanced scorecard means to translate the corporate-wide scorecard (referred to as Tier 1) down to first business units, support units or departments (Tier 2) and then teams or individuals (Tier 3).

Cascading strategy focuses the entire organization on strategy and creating line-of-sight between the work people do and high level desired results. As the management system is cascaded down through the organization, objectives become more operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as ownership is defined at each level. This alignment step is critical to becoming a strategy-focused organization.

Balanced Scorecard History

The Balanced Scorecard was originally developed by Dr. Robert Kaplan of Harvard University and Dr. David Norton as a framework for measuring organizational performance using a more balanced set of performance measures. Traditionally companies used only short-term financial performance as the measure of success. The “balanced scorecard” added additional non-financial strategic measures to the mix in order to better focus on long-term success. The system has evolved over the years and is now considered a fully integrated strategic management system.

This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton and built on work by Art Schneiderman at Analog Devices. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”

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