A Quick Guide to Balanced ScorecardsUpdated: Oct 27, 2016
The Balanced Scorecard (BSC) is a popular strategic management tool developed in 1992 by Robert Kaplan and David Norton to answer what the two researchers saw as a shortcoming in existing strategic planning methods: A way to connect the long-term objectives of a business to short-term performance measures, particularly financial indicators.
The problem is easy enough to understand; a company’s overall goals, usually expressed in its Mission & Vision Statement, are often somewhat abstract and difficult to express in terms of the day-to-day (or month-to-month, or year-to-year) activities and processes of the organization – it may not be clear to the people in the organization exactly how their work tasks at this moment are steps towards the company’s greater objectives, a bit of confusion that can create problems for maintaining productivity and motivation. The BSC is a way to “provide a roadmap” showing how to present activities lead to future objectives, and if used correctly, the tool can be very effective. If you have any questions our writers will gladly help you!
Background of the BSC & The Fundamental Ideas Behind It
Kaplan and Norton first introduced the Balanced Scorecard in an article in the Harvard Business Review in 1992 (“The Balanced Scorecard – Measures That Drive Performance”, HBR January-February 1992), in which they explained that any firm has four key perspectives from which it should consider its strategy: Financial, Customers, Internal Processes, and Learning and Growth. The firm needs to make money, and for that it needs customers; customers’ needs are served by the output of the firm’s internal processes, and in order to achieve and maintain a competitive advantage, the firm must learn and improve over time. Consequently, the BSC begins with a firm asking itself four important questions:
- What is our value to our shareholders? (the financial perspective)
- What is our value to our customers? (the customer perspective)
- In order to provide the value to our shareholders and customers, in what must we excel? (the internal processes perspective)
- How do we sustain our advantages and continue to improve? (the learning and growth perspective)
The answer to each of these four questions has four parts: A relevant objective or objectives; the measures of performance that appropriately assess progress towards those objectives; the specific target value of the performance measures that would signify the objectives’ having been successfully achieved; and the specific processes or activities that must be done in order to achieve them.
In form, the Balanced Scorecard is a four-sided matrix, with the firm’s vision and competitive strategy at its center:
The Balanced Scorecard (Source: Kaplan & Norton, “Using the Balanced Scorecard as a Strategic Management System”, HBR, January-February 1996)
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Advantages of the BSC
The first advantage of the BSC is that it forces firms to quantify their goals. Aspirations expressed in a Mission & Vision Statement such as “being an empowered organization” is a platitude without some explanation of what “an empowered organization” is, and how, exactly, the organization can become “empowered”. Or for that matter, whether or not being “empowered” actually has anything to do with effectively meeting stakeholders’ and customers’ needs, maintaining sound internal processes to achieve those, and improving the organization to maintain a competitive edge. The second advantage of the BSC is that its format makes it easy to see how all of the strategic management perspectives relate to one another. Conflicts between objectives in different areas are immediately apparent and can be corrected.
Perhaps the biggest advantage of the BSC is its versatility. Although it was designed for application in business management settings, the basic template can be applied to almost any initiative or organization. By slightly modifying the four key perspectives, the BSC can even be applied to specific areas of the organization and even to individuals. In fact, there is some research that suggests that the BSC is gaining, even more, use as a performance management and assessment tool in HRM applications than as a firm-level strategic planning tool.
Disadvantages of the BSC
Like many other strategic management tools, the BSC has one unavoidable potential handicap in that it is only as good as the quality of the information put into it. The tool suffers from the same risk as the SWOT analysis called SWAG (Scientific Wild-Ass Guess) by Oxford’s Professor Malcolm McDonald; the importance of objectives and other factors may be over- or underestimated or overlooked entirely, which leads to the BSC returning poor results because the right information is not actually included. Another problem that can make the BSC less effective than expected is that by design, it gives equal weight to all four of the key perspectives, while in actual practice, many organizations might need to give greater weight to one or another. For example, a non-profit organization would likely have very strong customer perspectives and a lesser focus on financial outcomes; without adjusting the BSC to reflect its priorities, the organization might end up actually hindering its efforts towards achieving its goals.
And finally, the results of some empirical research on the effectiveness of the BSC suggests that just as with most strategic management tools, its performance in real-world applications falls a little short of the academic hype. A fairly recent broad study of strategic management tool use and effectiveness found that the BSC tends to work better for larger and more complex firms than for smaller ones, and that the alignment of strategy and performance is perceived to be better among firms that use the BSC in combination with other strategic planning and assessment tools than among firms using the BSC by itself (E.Tapinos, R.G. Dyson & M. Meadows, “Does the Balanced Scorecard make a difference to the strategy development process?” Journal of the Operational Research Society, vol. 62, no. 5, 2011). One reason for this may be that, contrary to the assertions of Kaplan and Norton, the BSC is not actually designed to develop organizational strategy; the firm’s vision and strategy must necessarily exist beforehand in order for the BSC to work as designed, meaning that the BSC is the best thought of as a performance management and operational planning tool (hence its popularity in HRM practice), rather than a strategic development tool.
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