Balanced Scorecard

Fundamentals

The balanced scorecard is predicated on the notion that performance measures are a powerful influence on members of an organization, particularly if there is a connection with rewards, whether intrinsic or extrinsic. The first mention of the balanced scorecard is in a footnote to a 1989 Harvard case, Analog Devices, written about a company that had developed a “Blue Book” with a range of financial and nonfinancial measures. Early scorecards were a collection of measures that balanced financial against nonfinancial and leading indicators that led future performance against lagging indicators. It was a reaction to the relentless pressure by financial markets for ever-increasing returns and the focus on the factors that would affect ongoing profitability, such as customer satisfaction and improved internal processes. There was a recognized connection between the four dimensions of the scorecard, which are as follows:

• Financial —The outcome for all profit-making organizations is a financial result for stockholders measured by a range of metrics such as return on capital or net profit margin or growth in revenues.
• Customer —In most cases, it is a positive response from the customer that creates value for the organization by profitable sales. The metrics may include sales penetration as well as the level of customer satisfaction and loyalty.
• Internal Business Processes —To increase the quality of the customer relationship, operating processes will be continually improved to enhance the quality flexibility while reducing cost of these processes. Measurements may include cycle time, asset utilization, and quality metrics.
• Learning and Growth —The driving force of value creation is through the intellectual capital, the ideas, and innovation that bring about new products and services as well as processes, sometimes with rapid discontinuous innovation. It can be measured by the development of human capability, new products to market, and growth of strategic alliances.

For each dimension, the organization identified the key strategic objectives, then the measures that would determine whether the objective had been achieved. For each measure, targets were set and initiatives planned to reach the objectives. The organization needed to clarify its vision and make this the center of the balanced scorecard. The most difficult part of the scorecard was the learning and growth dimension. Implementers of the BSC found great difficulty in this dimension of the scorecard because the areas of intellectual capital and innovation are at the heart of future competitive advantage, yet the drivers are the most difficult to identify.

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