Summary by Carolina Saavedra
Master of Accountancy Program
University of South Florida, Summer 2002
To face the increasingly competitive global economy today, companies are realizing that they must make major changes to the old traditional measures of financial performance which can no longer adequately assess the newly structured organizations that exist today. The “old individual based task-oriented management” concept must be replaced with a “team-based process-oriented” management concept. Eighty percent of large American companies want to change their performance measurement systems and the Balanced Scorecard can help them do this.
What is the Balanced Scorecard?
The Balanced Scorecard is a set of financial and non-financial measures relating to a company’s critical success factors (p. 21). It is an attempt to capture the essence of the organization’s critical value-creating activities (p. 23). It has integrative components that reinforce one another in indicating what the current and future prospects of a company will be. Its purpose is to concentrate corporate focus on performance measurement innovation since traditional reporting systems aren’t able to measure performance in the new manufacturing environments and are not helpful in increasing market share and profits.
Advantages of the Balanced Scorecard
It puts strategy, structure, and vision at the center of management focus.
Since it integrates traditional and nontraditional performance measures, it keeps management focused on the entire business process and helps ensure that actual current operating performance is in line with the long-term strategy and customer values (p. 22).
It maintains a balance between building long range competitive abilities and recognizing investors’ attention to financial reports.
Financial measures are viewed in the larger context of the companies long range competitive strategies for creating future value through investment in customers, suppliers, employees, processes, technology, and innovation. (p. 22).
It enhances the overall goals and objectives and a company
It allows management attention to focus on managing results from the perspective of customers, internal business processes, and learning and growth.
Major Components of a Balanced Scorecard
A Balanced Scorecard must combine past financial measures with measures of the firm’s drivers of future performance. The specific objectives and measures come from the firm’s vision and strategy. The basic framework will include at least four major perspectives:
1. Financial perspective: Determines what kind of financial performance to provide to investors.
2. Customer perspective: Companies identify their customer and the market segments in which they want to compete and align their measures of customer values with their targeted market segments.
3. Internal business processes perspective: Improve the internal processes that will help reach the financial and customer perspectives. It may require defining a complete internal process value chain that identifies current and future customer needs and creating solutions for them.
4. Learning and growth perspective: Based on the previous three, the company must identify objectives and measures to drive continuous organizational learning and growth. These objectives should be the drivers of successful outcomes in the first three perspectives.
With these perspectives, managers are able to see how their business units are creating value for current and future customers and identify when internal capabilities need to be enhanced as well as improve future performance. The Balanced Scorecard communicates goals and rewards employees who enhance them. It also retains an interest in short-term performance, but at the same time, clearly reveals those drivers leading to long-term financial and competitive performance (p. 23).
Fitting the Balanced Scorecard to the Organization
It is custom designed to its company with its focus on the integration of the entire business process. First, make a preliminary assessment of the overall business strategy. Identify business processes, goals and objectives and then rank the measures that will capture the organization’s progress toward those goals and objectives. In this paper this was done for four small companies whose sizes ranged from 110-1200 employees; an electronics firm, a food ingredients company, a commercial bank, and a Biotechnology firm.
Different Goals and Scorecards
In this study, the food ingredients company was most interested in the financial perspective, the biotechnology firm was most interested in the customer perspective, and the commercial bank created its own separate community perspective category which included things like supporting community activities and being good corporate citizens. This shows that managers are designing the goals and measures that fit their own unique needs and that the Balanced Scorecard can be effective in small companies as well as in large ones.
Four new Management Processes
The Balanced Scorecard will let managers introduce “four new management processes that separately and in combination, contribute to linking long term strategic objectives with short term actions” (p. 25). The first process translates the vision and strategy into operational terms for employees to understand. They are stated as an integrated set of objectives and measures that describe the long term drivers of success. The second process is communicating and linking. It ties the overall objectives and strategies to departments and individual objectives. This takes the place of evaluating departments using financial performance and individual incentives. By using this approach you make sure that all the levels of the organization are aware of the company’s long term strategy. The third process is business planning. Businesses can integrate their business and financial planning. The Balanced scorecard helps set goals that provide a basis for allocating resources and setting priorities. It also helps in eliminating some initiatives and selecting others that are more effective for moving the organization toward its long-term strategic objectives (p. 26). Finally, the fourth process is feedback and learning. It helps facilitate learning and supplies strategic feedback. It can help organizations modify their strategies in response to changing circumstances.
The Personal Scorecard
Personal scorecards are a way of translating the company’s scorecard into specific goals and measures for each individual. They will also not be identical since each individual fills a unique role in the organization and each individual has different skills, talents, and interests. To achieve the greatest success, these individual differences must be exploited and synergies must be created among the workers since a corporation runs best with coordination and cooperation and specialization among its members. Individual personal scorecards should be consistent with the company’s overall strategies, goals, and measures but must also be flexible to accommodate to the individual’s strengths and weaknesses.
One thing that still remains in question is whether or not a company’s compensation system should be linked to its Balanced Scorecard. Some companies have done so because they believe tying financial reward to performance is very motivating, but they must also realize that there are risks involved in doing this.
If the emphasis on individual achievement shifts to cooperation and teamwork, a company’s short term formula based incentive compensation system will also have to change. Since a longer term viewpoint is used in the balanced scorecard, incentive rewards may need to be set more subjectively. Longer term subjective evaluations are less likely to be distorted. Its role in the incentive compensation system is still to be discovered.
10 steps To Implementing the Balanced Scorecard
1. A strategic planning retreat with all levels of management reaches a consensus on the overall vision, strategic goals, and objectives of the company and identifies the critical perspectives.
2. A strategic planning committee formulates objectives for each perspective from step 1.
3. With the balanced scorecard as a communication tool, committee seeks comments and acceptance from all members.
4. Revise balanced scorecard.
5. Communicate the revised version to everyone and then each individual creates their own personal balanced scorecard to supplement the overall goals and objectives described.
6. Strategic planning committee reviews individual balanced scorecards and revises those as well as the company’s.
7. Management formulates a five-year strategic plan for the overall organization based on the balanced scorecard. The first year plan is expanded into the annual operating plan for the next year.
8. Review individual and company progress quarterly and identify areas that need attention.
9. Based on personal balanced scorecards, the company evaluates each member’s performance for the past year and makes recommendations relating to retention, promotion, salary increases or other rewards (p .27).
10. Strategic planning committee revises the company’s balanced scorecard and the five-year strategic plan based on external and internal scanning of the current condition and changes in the economic environment (p. 27).
The scorecard for the 21st Century
The balanced score card is a new idea that will help restructure firms and help them make it through difficult and changing times. It allows management to focus on those goals and objectives and the measures that will help reach those goals and objective to meet the needs of the 21st century. The best thing about it is that scorecards are unique to the company and will specifically fit the needs of the company, subunit, or individual.
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