01 Mar Using the balance scorecard as a Strategic Management System
As businesses around the world transform themselves for competition that is based on information, their ability to exploit intangible assets has become far more decisive than their ability to invest in and manage physical assets. In recognition of this change, the balance scorecard was a concept introduced by Robert S. Kaplan and David P. Norton to supplement traditional financial measures with criteria that measured performance from three additional perspectives – those of customers, internal business process, and learning and growth. It, therefore, enabled companies to track financial results whilst simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for growth. The scorecard wasn’t a replacement for financial measures; it was their complement.
Most companies operational and management control systems are built around financial measures and target, which bear little relation to the company’s progress in achieving long-term strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.
Managers using the balanced scorecard do not have to rely on short-term financial measures as the sole indicators of the company’s performance. The scorecard lets them introduce four new management processes, that separately and in combination, contribute to linking long-term strategic initiatives with short-term actions.
- Translating the vision – helps managers build a consensus around the organisation’s vision and strategy. For people to act on the words in vision and strategy statements, those statements must be expressed as an integrated set of objectives and measures agreed upon by all executives that describe the long-term drivers of success.
- Communicating and linking – lets the managers communicate their strategy up and down the organisation and link it to departmental and individual objectives. The scorecard gives managers a way of ensuring that all levels of the organisation understand the long-term strategy and that both departmental and individual objectives are aligned with it.
- Business planning – enables companies to integrate their business and financial plans. Most companies today are implementing a variety of change programs. Managers often find it difficult to integrate those diverse initiatives to achieve their strategic goals – a situation that leads to frequent disappointments with the programs’ results. But when managers use the goals set for balanced scorecard as the basis for allocating resources and setting priorities, they can undertake and coordinate only those initiatives that move them toward their long-term strategic objectives.
- Feedback and learning – gives companies the capacity for strategic learning. Existing feedback and review processes focus on whether the company, its departments have met their budgeted financial goals. With the balanced scorecard at the centre of its management systems, a company can monitor short-term results from the three additional perspectives – customers, internal business process, and learning and growth – and evaluate strategy in light of recent performance. The scorecard thus enables companies to modify their strategies to reflect real-time learning.
Without a balanced scorecard, most organisations are unable to achieve a similar consistency of vision and action as they attempt to change direction and introduce new strategies and processes. The balanced scorecard provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company’s competitive market and technological environments.