Balanced Scorecard Definition and How it Works

Balanced Scorecard Definition and How it Works

7 mins readComment
Syed Aquib Ur
Syed Aquib Ur Rahman
Assistant Manager
Updated on Dec 12, 2023 19:09 IST

Learn how the Balanced Scorecard drives business success! This comprehensive blog highlights its strategic perspectives, connecting customer satisfaction, internal processes, learning & growth, and financial goals. Uncover its power in aligning strategies, enhancing performance, and streamlining operations for sustained growth and profitability.

Balanced scorecard

For prioritising on deliverables tied to performance and business success without much focus on changing requirements, managers use a proven framework. Balanced Scorecard (BSC). This framework allows for setting the priority of resources needed for development that align with the bigger business goals. It is sequential and routine-oriented. Some of these areas include innovation, technical competence, finance, legal, operations, customer, people management, and everything else that benefits the business in the future. 

Traditionally, these goals serve as the bridge between strategic objectives from the organisation’s perspective and the key performance indicators of the middle to lower levels of management. This is when we are talking about broad topics such as strategic management

While it’s a lot to take right now, let’s simplify this concept. 

Balanced Scorecard Definition

The balanced scorecard (BSC) is a strategic and well-structured tool for performance management. Common in corporates, there are four balanced perspectives of the balanced scorecard that cover both internal and external business environments. These are performance of customer analysis, internal business processes, learning and growth of employees, and financial state. And they form the scope of balanced scorecard. 

Organisations use the balanced scorecard to create strategies that can be implemented. Without using this framework, strategy execution takes a back seat and focuses on creating a strategy that may be unachievable. So, there should be a ‘Balance’ between the four perspectives, from customer to finance. Also, there must be a way to measure these perspectives.

Balanced scorecard basics

But, the balanced scorecard meaning should be confused with replacing traditional reports on an organisation's financial and non-financial business units. Instead, it provides insight into the strategic objectives and performance of those desired goals during planning, vision, and mission. Also, a balanced scorecard measures past data on performance, which helps in providing feedback for the future. 

How Does a Balanced Scorecard Help a Business

Understanding the mechanism of the balanced scorecard requires knowing how companies measured performance before and after it was introduced. 

The concept is largely associated with researchers David P Norton and Robert S Kaplan. They based their study on General Electric company’s 1950 project. In the Harvard article, Conceptual Foundations of the Balanced Scorecard, Robert S. Kaplan discusses the GE’s way of measuring performance of ‘decentralised’ business units with 8 objectives tied to the main financial objective. 

  1. Profitability (measured by residual income)
  2. Market share
  3. Productivity
  4. Product leadership
  5. Public responsibility (legal and ethical behaviour, and responsibility to stakeholders including shareholders, vendors, dealers, distributors, and communities)
  6. Personnel development
  7. Employee attitudes
  8. Balance between short-range and long-range objectives

These objectives, especially the ‘balance between short and long range objectives’ set the basis of the official Balanced Scorecard in the early 1990s. 

Kaplan and Norton also state the in their article the way financial information has been used in big organisations to measure performance of employees does not give correct signals regarding ‘continuous improvement’. Even if they focus on the operational features as a way of performance management metric, it does not provide the full picture. 

That’s why the ‘balance’ between financial and operational measurements is important. 

Kaplan’s Harvard Business Review paper illustrates the four perspectives as mentioned in the earlier section. These perspectives are linked to each other. 

  1. How are we perceived by customers? (customer perspective)
  2. In what areas do we need to excel? (internal perspective)
  3. Can we sustain improvement and generate value? (learning and growth perspective)
  4. How do we appear to shareholders? (financial perspective)
Kaplan and Norton

Source: Conceptual Foundations of the Balanced Scorecard

Connecting the Perspectives through the Strategy Map

The strategy map serves as a causal relationship of the perspectives mentioned in the balanced scorecard. The cause and effect relationship starts from the employees generally in a logical fashion, according to Kaplan.

Employees who receive enhanced training in quality management tools (let’s say the 7 QC tools) can effectively reduce both process cycle times and defects within the process. These improvements in processes subsequently result in shorter customer lead times, enhanced on-time delivery, and a decrease in defects encountered by customers. The higher quality experienced by customers contributes to increased satisfaction levels, improved customer retention, and greater spending. Ultimately, this leads to elevated revenues and improved profit margins.

According to the authors, the senior managers now get a broader perspective of the performance without adding performance measures much. There is a limited amount of performances that are measured. 

Let’s look at this visual representation of the strategy map that details the broader perspectives of the balanced scorecard. 
Strategy map Kaplan and Norton

The strategy map of Norton and Kaplan, based on the Balanced Scorecard, is a visual representation of how an organisation creates value for its shareholders and customers. 

Financial Perspective

The financial perspective focuses on the financial goals, such as increasing revenue, reducing costs, and improving profitability.

Customer Perspective

The customer perspective focuses on the needs and wants of customers. It includes goals such as increasing customer satisfaction, loyalty, and market share.

Internal Process Perspective

The internal process perspective focuses on the processes that the organisation uses to deliver its products and services to its customers. It includes goals such as improving efficiency, quality, and innovation.

Learning & Growth Perspective

The learning & growth perspective focuses on the organisation's ability to learn and grow over time. It includes goals such as developing employee skills, improving organisational culture, and investing in research and development.

The strategy map shows how the goals in each perspective are interconnected. For example, improving customer satisfaction (customer perspective) may lead to increased revenue and profitability (financial perspective). Similarly, investing in employee development (learning & growth perspective) may lead to improved efficiency and innovation (internal process perspective).

Benefits and Criticism of a Balanced Scorecard

Benefit

Criticism

Provides a comprehensive view of an organization's performance

Can be time-consuming and expensive to implement

Helps to align an organization's strategy with its operational activities

Can be difficult to measure and track progress

Enables organizations to track their progress over time

Can be too focused on financial measures

Provides a framework for communication and collaboration

May not be suitable for all organizations

Can be used to identify areas for improvement

Can be seen as a bureaucratic exercise


Balanced Scorecard Example

Let’s take an example of a retail clothing store. 

Financial

  • Objective: Increase profitability by 10%
  • Measures:
    • Revenue
    • Profit margin
    • Return on investment (ROI)
    • Customer lifetime value (CLTV)
    • Number of new customers
    • Average order value

Customer

  • Objective: Increase customer satisfaction by 5%
  • Measures:
    • Customer satisfaction score
    • Net Promoter Score (NPS)
    • Repeat purchase rate
    • Customer acquisition cost (CAC)
    • Customer lifetime value (CLTV)
    • Number of customer complaints
    • Social media engagement

Internal Processes

  • Objective: Improve inventory efficiency by 10%
  • Measures:
    • Inventory turnover rate
    • Inventory carrying cost
    • Stockout rate
    • On-time delivery rate
    • Order processing time
    • Number of product defects

Learning & Growth:

  • Objective: Increase employee training hours by 20%
  • Measures:
    • Employee training hours
    • Employee satisfaction score
    • Employee turnover rate
    • Number of new hires
    • Number of promotions
    • Number of awards and recognition

Learn and Apply the Balanced Scorecard Framework

So far, we covered the following. 

  • Explored the significance of the four perspectives—Customer, Internal Processes, Learning & Growth, Financial—within the Balanced Scorecard framework.
  • Examined how improvements in internal processes led to positive outcomes in customer satisfaction and financial performance.
  • Reviewed the visual representation illustrating the alignment of objectives across the Balanced Scorecard perspectives.
  • Explored challenges in implementation and evaluated the framework's adaptability for diverse organisational settings.
  • Uncovered the comprehensive view of performance and strategic alignment facilitated by the Balanced Scorecard.

And by now, you should be able to use or suggest this framework. But if you are planning to learn it from experts, we would recommend courses, such as Balanced Scorecard Professional from Vskills. Empower your learning the right way!

Some FAQs

What are the four perspectives of the Balanced Scorecard?

The four perspectives of the Balanced Scorecard are:

  • Financial Perspective
  • Customer Perspective
  • Internal Process Perspective
  • Learning & Growth Perspective

How to do a balanced scorecard?

To create a Balanced Scorecard:

  • Define objectives for financial, customer, internal processes, and learning & growth.
  • Identify key performance indicators (KPIs) aligned with each objective.
  • Develop strategies and initiatives to achieve the set targets.
  • Implement and monitor regularly to assess performance and make adjustments as needed.

Why is balanced scorecard better?

The Balanced Scorecard offers a holistic view, aligns strategies with objectives, tracks diverse aspects of performance, and enhances communication and collaboration within organisations.

Can a Balanced Scorecard adapt to different industry types?

Yes, the Balanced Scorecard is adaptable and has proven effective across various industries, including manufacturing, healthcare, finance, and services. Its flexibility allows tailored implementation to suit industry-specific objectives and challenges.

What role does technology play in implementing a Balanced Scorecard?

Technology plays a significant role in streamlining Balanced Scorecard implementation. Digital tools aid in data collection, analysis, and reporting, fostering smoother execution and enhanced decision-making capabilities.

About the Author
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Syed Aquib Ur Rahman
Assistant Manager

Aquib is a seasoned wordsmith, having penned countless blogs for Indian and international brands. These days, he's all about digital marketing and core management subjects - not to mention his unwavering commitment ... Read Full Bio