Model:
Summary:
Kaplan and Norton's Balanced Scorecard is a strategic planning and management system that is widely used in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.
The Balanced Scorecard Model
The Balanced Scorecard suggests that an organization is viewed from four perspectives, and to develop metrics, collect data, and analyze them relative to each of these perspectives:
- Learning and Growth (People):
- Emphasizes the importance of employee training, corporate cultural attitudes, and self-improvement.
- Focuses on hiring and retaining talented staff, providing the necessary tools and training, and creating an environment that fosters growth and development.
- Recognizes that a company’s innovation and improvement stem from its ability to learn and grow.
- Business Processes (Operations):
- Centers on internal business processes.
- Metrics based on this perspective allow managers to know how well their business is running, and whether its products and services conform to customer requirements.
- The goal is to provide a process that leads to a high level of quality and efficiency in operations.
- Customer (Customer Satisfaction):
- Focuses on customer satisfaction and retention.
- Companies must know who their target customers are, what they need, and how to deliver the value expected.
- The perspective includes measures such as market share, customer retention, customer satisfaction, and customer value.
- Financial (Financial Performance):
- Examines if a company's implementation and execution of its strategy are contributing to the bottom line improvement.
- Includes traditional financial measures like net income, return on investment, and cash flow that are necessary for understanding the financial health of the organization.
Importance for Leaders
- Strategic Alignment: The Balanced Scorecard helps ensure that the company’s strategy is translated into operational terms. It aligns the day-to-day work that everyone is doing with strategy.
- Focus on Future Performance: By emphasizing leading indicators such as employee satisfaction, internal processes, and customer satisfaction, leaders can predict and influence future financial performance rather than just reviewing past financial outcomes.
- Holistic View: It gives leaders a comprehensive view of the business. Financial measures tell the story of past events, an adequate story for industrial age companies. Today's environment requires more comprehensive measures.
- Communication and Feedback: The Balanced Scorecard facilitates communication and understanding of business goals and strategies at all levels of the organization. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.
- Linking Vision and Strategy to Action: Leaders can use the scorecard to communicate the vision and strategy, align individual performance to the goals, and track whether the company is achieving the set objectives.
The Balanced Scorecard is important because it provides a clear prescription as to what companies should measure to 'balance' the financial perspective. It’s a tool for leaders to articulate and communicate strategy, link it to individual performance, and provide a framework for operationalizing a long-term plan.
Sources:
Quotes:
"People, then products, then traffic, then revenue." - Tony Hsieh & Marissa Mayer
“All success is a lagging indicator.” - Ryan Holiday