Companies today are in the midst of a revolutionary
transformation as Industrial age competition is shifting to Information age
competition. The cut-throat competition that businesses faced in the last two
decades has made them to look for improvement initiatives like Total Quality
Management, Just-in-Time (JIT) systems; Activity based cost management,
Employee empowerment and Re-engineering. Though these initiatives resulted in
enhanced shareholder value, their structure was disjointed and focused on the short-term
survival and growth. The programs centered on achieving breakthrough
performance merely by monitoring and controlling financial measures of past
performance. This collision between the irresistible force to build long-range
competitive capabilities and the immovable object of the historical-cost
financial accounting model has led to a new blend the Balanced scorecard.
The Balanced scorecard retains the traditional financial
measures and complements them with measures that are drivers of future
performance. The objectives and measures of the scorecard are derived from an organizations
vision and strategy and these view organizational performance from four
perspectives: financial, customer, internal business process and learning and
growth. These four perspectives provide the framework for the Balanced
scorecard.
The balanced scorecard is a management system (not only a
measurement system) that enables organizations to clarify their vision and
strategy and translate them into action. It provides feedback around both the
internal business processes and external outcomes in order to continuously
improve strategic performance and results. When fully deployed, the balanced
scorecard transforms strategic planning from an academic exercise into the
nerve center of an enterprise.
Kaplan and Norton describe the innovation of the
balanced scorecard as follows:
"The balanced scorecard retains traditional
financial measures. But financial measures tell the story of past events, an
adequate story for industrial age companies for which investments in long-term
capabilities and customer relationships were not critical for success. These
financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and
innovation."
What is a Balanced Scorecard?
The balanced scorecard is a management system (not only a
measurement system that enables organizations to clarify their vision and
strategy and translate them into action. It provides feedback around both the
internal business processes and external outcomes in order to continuously
improve strategic performance and results. When fully deployed, the balanced scorecard
improves strategic planning from an academic exercise into the nerve center of
an enterprise.
First of all the balanced scorecard is a way of
- Measuring organizational, business unit or department
success;
- Balancing long and short term actions;
- Balancing different measures of success and
- Financial
- Customer
- Internal Operations
- Human Resource Systems & Development (Learning
& growth)
- A way of tying strategy to measures of action
The Need for the scorecard:
The objective of any measurement system should be to
motivate all managers and employees to implement successfully the business
units strategy. Those companies that can translate their strategy into
measurement system will be able to execute their strategy because they
communicate their objectives and their targets. The communication makes
managers and employees focus on the critical drivers enabling them to align
investments, initiatives and actions accomplishing strategic goals.
Historically, the measurement system for any business has
been financial. Accounting was considered to be the language of business
Innovations in measuring the financial performance of the industrial age
companies played a vital role in their successful growth. And financial
innovations, such as the Return on Investment (ROI) metric, and operating and
cash budgets, were critical to the success of these corporations.