Since its first introduction by David Norton and Robert Kaplan almost thirty years ago, balanced scorecards have become immensely popular as a tool for setting more constructive business goals. Statistically, as many as three-quarters of enterprises successfully apply them in their organizational management and strategic planning. Our purpose in this article is to explain what a balanced scorecard is and how to use it most effectively.
As its name suggests, a balanced scorecard aims at providing a more balanced management system by complementing the traditional interest in the financial aspects of business activities with the additional focus on customer relationships, organizational culture, and developmental perspectives. The more comprehensive vision it creates will help your company set more adequate objectives and greatly facilitate its productive operation and growth.
Four aspects of organizational vision
In simple terms, this business tool divides your company’s overall organizational planning system into four interrelated yet distinct aspects, namely:
1. Financial management
2. Customer relationship management
3. Organizational structure and internal dynamics
4. Developmental perspective
Each aspect is then further subdivided into four essential components, namely:
- Goals
- Initiatives
- Targets
- Key performance indicators
By combining these sixteen factors on a user-friendly chart called a balanced scorecard, you can get a more intelligible and constructive idea of where your company currently stands and what it needs for a more effective progression towards your ultimate business goals.
BSC in action
The practical application of the card depends on the type of company and the nature of its organizational activity. One of the BSC’s most attractive features is its incredible versatility, and you will find an impressive balanced scorecard example in almost any type of activity, profit and non-profit alike.
For instance, financial organizations have used it to improve their customer services. Retail stores have applied it in their marketing management and used the card to reduce staff turnover. Public offices use balanced scorecards to improve their reports and facilitate more efficient document processing.
Let us now explain these aspects and components individually and in more detail in separate sections.
Financial Management
The first aspect covers a variety of financial data, like return on investment, sales profitability, gross revenues, income targets, et cetera. They play a significant role in the overall business operation, no doubt. But the results of the financial analysis are often meaningless by themselves, and they may be impossible to apply if taken out of the larger context of organizational functioning.
Customer Relationship Management
This aspect involves assessing customer satisfaction, determining the clients’ and shareholders’ most immediate needs and preferences, boosting the company’s reputation on the market, and identifying the most effective strategies for customer acquisition and retention. The most significant sources of information are customer feedback and the analysis of consumer behavior.
Organizational Structure and Internal Dynamics
This section analyses the daily business operations within the specified framework of the overall strategic objectives. The ultimate purpose is to identify and eliminate the operational defects, like the undersupply and delays, and to adjust the company’s internal processes to the ever-changing marketing challenges and business needs.
Developmental Perspective
The final aspect focuses on the overall performance of your enterprise in terms of its human resource management, organizational culture, and technological development. Essentially, it is akin to CRM and uses similar investigation techniques, but it applies the latter to assess employee satisfaction and staff turnover instead.
Essential components
A BSC makes it easier to analyze and envision each organizational aspect by describing it in terms of four fundamental factors:
- Goals
The idea is to set specific objectives and define them in operational terms. It will help you have a better idea of what you want to achieve, and you will find it easier to develop an implementation procedure as a result.
- Initiatives
Once you know your goal, you are ready to work out a set of specific initiatives and step-by-step instructions on how to achieve it. Moreover, the chart will help you see how these steps correlate with the company’s overall goals.
- Targets
Well-defined goals within the larger organizational context will make it easier to identify the issues to address and help you set your targets too. While the first component expresses your goals, this one helps to work out how you will be measuring your achievements.
- Key Performance Indicators
At this stage, you are ready to express your target in numeric values. Thus, you can always refer to the scorecard to see whether you are doing well enough, which adjustments are necessary, and how your progress correlates with all the team members and your performance in the other three aspects.
Advantages of using the BSC
Balanced scorecards provide several advantages for effective organizational management. However, numerous reports by the companies that implement the tool state the following three as the most outstanding ones.
- Enhanced Readability and Implementation
The most immediate advantage of using a balanced scorecard is that it includes all the relevant strategic and management data in one easily readable chart instead of scattering them across multiple tables and reports. That saves a lot of time and energy on reading them, makes the information more intelligible, and increases the probability that your staff will be implementing the required strategies correctly.
- Improved Comparative Analysis
The BSC allows the executive managers better correlation and coordination of the achievements in individual components of the overall business plan to make sure that separate strategic decisions do not harm each other or stand in each other’s way.
- Reduced Risk of Doing Too Well
It helps you avoid or at least reduce the risk of excessive optimization that can negatively affect your overall performance, result in unnecessary costs and lower profits and ultimately damage your company’s public image and reputation on the market.
Creating your BSC
The sections above have explained how to create a balanced scorecard for your particular purposes, and the BSC templates provided by Weje will help you complete the task more quickly and easily. The template presents each aspect in a separate box subdivided into four components, with the boxes connected in a strategic circle:
1. Set your strategic goals for the first aspect in the relevant column.
2. Decide on specific initiatives and steps towards achieving those goals and fill them in the corresponding box.
3. Select the criteria for your successful progression and how you will be measuring them.
4. Calculate the precise numeric values for each measurement and fill them in.
5. Repeat the procedure for the next aspect, and so on for all four boxes.
Applying our BSCs in your enterprise
The Weje balanced scorecard model presents the four aspects connected in a circle in the following pattern: finances – customer relationship management – organizational processes – developmental perspectives – back to finances – and so on in a never-ending cycle.
Of course, since there is no first step in the circle, it is perfectly possible to start from the aspect that seems most relevant under the current circumstances or best agrees with your particular business needs and management style.
Whichever box you choose to start from, fill the data in each column in the box in the order prescribed by the template, and that will help you identify the data for the next box, and so on ad infinitum.
Conclusion
1. A balanced scorecard is a business metric tool developed to help you identify, manage and facilitate your company’s efficient internal processes, productive operation, and constructive development.
2. Its primary purpose (and its unique contribution to business management) is to expand your organizational vision by including the nonfinancial perspectives in the overall strategic planning and management system.
3. Incidentally, the model is equally suitable for non-profit organizations and public agencies. The actual profit is one possible organizational goal, whereas the scorecard is an optimal tool for executing effective management and developing constructive strategies, whatever the ultimate purposes may be.
4. By applying the tool correctly, namely:
- Dividing your overall vision into the four distinct aspects discussed in the article
- Identifying and expressing in operational terms the four components of each aspect
- Feeding the data thus produced into a user-friendly chart that interrelates all the components
You will considerably enhance your company’s operation, boost customer satisfaction and employee performance and increase its chances of constructive future development.
