Benefits of Balanced Scorecard Approach to Business Management

The modern business world is ever changing and ever evolving and as the famous saying goes; the businesses must change or they will be changed. A business requires constant supervision and improvement to stay in this ever-ending game of the ‘survival of the fittest’. The management must set specific goals to be achieved by the business entity within specific measurable periods. This blog aims to analyze one such popular management technique for measuring performance: Balanced Scorecard Approach.

The Birth of the Balanced Scorecard:

In 1992, David Norton and Robert Kaplan introduced the Balanced Scorecard Approach in their article. It was written based on a 1990 Nolan, Norton multi-company research project and attempted to analyze the impact of the intangible assets on a company’s value creation. They improvised the article in 1993 and that lead to the release of their article ‘The Balanced Scorecard’ in 1996.In the words of Robert Kaplan in the article ‘Conceptual Foundations of the Balanced Scorecard’, Norton states that they believed that the intangible assets have to be included to manage and improve their performance. By including the intangible assets, they believed that this could prove to be a more comprehensive measure of performance.

The Four Pillars of the Balanced Scorecard:

The Balanced Scorecard comprises four essential pillars: Finance, Customers, Business Processes, Learning and Growth.

1.Finance:

The financial dimension of BSC aims to increase the returns on the investment of the business and thereby satisfy the stakeholders of the business. The financial dimension includes an exhaustive list of metrics like sales, profit, returns on investment, cost reduction, setting budgets and measuring variances, settings targets for sales and introducing measures to improve the avenues of the revenue and thereby increase the value proposition of the business.

2. Customers.

Customers are one of the largest external stakeholders, the key beneficiaries and the determine the fate and course of the business. Hence any organization should strive for the satisfaction of the customers, measure it, improvise the performance, identify variances and try to improvise their offerings and thereby securing the loyalty and trust of the customer. Understanding customer feedback and reflecting upon the same serves as one of the key inputs to improvise the business. Some of the key metrics include the quality, pricing, availability, brand visibility, customer retention, etc.

3. Internal Business Processes

Internal Processes form the bloodline of any organization. Internal Processes can make or break an organization. Hence setting up robust processes and updating them in a timely manner helps to stay in the track to achieve businesses’ long term plans. Setting processes often revolves around setting standard operating procedures to deal with day-to-day operations which liberates the management from dealing with the daily hassles and provides them with the time to deal with the expansion objectives and the strategic measures. Some of the key measures including identifying the bottlenecks, setting SOPs and measuring compliance against the same and optimizing processes by comparing against industry benchmarks thus improving productivity.

4. Learning and Growth:

This perspective also known as the organizational capacity perspective measures entire organizational capacity to learn and transform and includes many metrics such as the employees’ capacity to learn, training provided to them, team work, harmony among the team, the core strengths and the general culture in the organization. This perspective typically is broader than the employee’s capabilities and refers to the organization’s collective capability to learn, adapt and grow using employee capabilities, leadership and information or data that is made available to the organization as the organization navigates through various business environments.

Benefits of Balanced Scorecard Approach:

Balanced scorecard approach helps to identify the progress made in intangible areas that are often ignored in performance metrics. Balanced scorecard approach can be used to identify the KPIs that are crucial for propelling the organization towards their strategic objectives. The four elements listed in Balanced Scorecard are often interconnected and interdependent on each other. Hence these elements do not operate on isolation and achieving an objective by compromising other objectives or giving less attention to the objectives to other aspects often tends to disturb the harmony. The four aspects have to be given focus and strategy makers should try to strike a balance between the elements which helps create the “Organization Synergy Effect”. The objectives set in these areas help to achieve the targets set at an organizational level. Thus balanced scorecard approach also lays emphasis on qualitative aspects, thus providing a more comprehensive measure of performance while also focusing on systems /methodologies used to achieve the same.

Setbacks of Balanced Scorecard Approach:

Balanced scorecard approach is often criticized to be rigid and complex. Some authors have also criticized the approach to be highly subjective and lacks its derivation from actuarial or economic theories. Implementing Balanced Scorecard Approach is regarded as a time consuming approach and the articulators of the approach have themselves stated that it requires two years to implement BSC approach in an organization.

Conclusion:

Balanced scorecard is not just a measurement tool but a strategic management tool that guides organizations towards a sustainable success. By focusing on both short term and long term objectives, it empowers businesses to adapt to changing environments while staying to their mission and values.