Balanced ScoreCard

Balanced scorecard

Most companies focus solely on financial measures. This is considered useful but the weakness is that they are entirely historical in nature and they provide short term forecasts than long term ones. Now due to the ever changing environment and increased business competition,a company must now focus on the indicators of future success. The balance scorecard provides a means for the broader focus on the leading indicators.

The balanced scorecard was created by Robert Kaplan as a means of moving organizations away from concentrating solely on financial data. Bsc is a very useful tool which shows a company specific financial and non financial indicators. The balanced scorecard translates a company's strategy into four balanced categories. Which are financial measures, customer and internal business process and learning and growth measures. The financial measures show the past performance of a firm while the remaining three measures drive future financial performance.

The objective of the balanced scorecard is to simultaneously focus on financial information and on creating the abilities In tangible assets required for long term growth.The uses of a balanced scorecard to management includes:

• Clarify and communicate strategy

• Align individual and unit goals to strategy

• Link strategy to the budgeting process

• Get feedback for continuous strategy improvement.

For a firm to effectively develop its strategies,there is a need for a swot analysis which analyses the firm's internal strengths and weaknesses and then analyze its external opportunities and threats. The full meaning is Strength,Opportunities,weaknesses and threats.

Strengths:

The analysis of strengths looks into the internal,it includes the organization's core competencies, or skills the company performs with a clear advantage. A weakness may be something an organization is not particularly good at,compared to its competitors it is clearly seen to be at a disadvantage.

Critical success factors are specific,measurable goals that must be met in order to achieve a firm's strategy. Critical success factors are elements that are key to a firm maintaining a competitive advantage. Managers need to come to a consensus on defining each critical success factors.

After defining the Critical Success Factor, a measurement unit must be assigned to each one. According to Kaplan and Norton,creators of the balanced scorecard, "if you can't measure it,you can't manage it." The measurements must encompass more than just financial measures.

Effective use of Balanced Scorecard

Balanced scorecard should foster a congruence of goals by all aspects of the organization. No set of measurement tools will be successful if each manager is motivated to achieve his or her goals at the expense of other goals. The balanced score card creates an overall view of how the individual contributes to strategic success.

Linking the four categories together with the strategy requires understanding three principles which are : Cause-and-effect relationships; outcome measures and performance drivers and the link to financial measures.

Cause and effect relationship:it is used to analyze case scenarios, here cause and effect relationships are hypotheses using if -then statements.

Outcome Measures and performance drivers:

For the cause and effect chains of critical success factor to be useful,there must be linked to a definite outcome and a performance driver that says how the outcome can be met.Outcome measures are based on historic indicators of success such as profitability, market share employee turnover,customer retention.

Performance drivers are leading indicators that are specific to the strategy chosen by a particular business unit for example new patents by research companies,cycle time by manufacturing companies and so on. Performance drivers work hand in hand with outcome measures because while performance indicators show only how to perform in the short term,outcome measures indicate whether the strategy is successful in the long term.

It is necessary that any initiative a company embarks on should be linked to the financial outcome measures to be able to assess the progress of the new initiative.

Non Financial Balanced score card measures.

The three other categories are non financial measures, to drive financial performance,the balanced scorecard requires assessment of customer,internal business process and learning and growth measures.

Customer Measures

Customers are very essential to a company,they are the company's source of revenue and without them there is no end to which the company produces its products. The customer perspective must include specific outcome measures and specific performance drivers. Normally it is not feasible for a company to target everyone without losing its focus on its core customers so therefore a company must shape performance drivers which can also be called value propositions that are specific to market segments and their strategy.

Primary customer outcome measure include:

Market share

Customer Acquisition

Customer Satisfaction

Customer Retention

Customer Profitability

Market share:

It is a proportion of customer's that use a company's product or service out of the possible number of users in that particular market share. Companies hope to increase their market share to the point where it does not become a burden,increasing market share can be a burden if the company targets everyone including the non profitable customers,and it becomes more costly than beneficial to service this customers thereby leading to a regression in profits.

Customer Acquisition:

Companies with a growth strategy would focus strongly on customer acquisition measure,but all companies need to add new customers because customer retention is never 100%. Customers might decide to leave and go to competitors if they are unsatisfied,and to maintain sales volume,a company should always look to add more customers to offset the customers lost.

Customer Satisfaction:

Customer satisfaction is a measure of how well the company has been able to meet the needs of the customers. Customer satisfaction is important because if a company's customers remain consistently unsatisfied,they would move to its competitors to seek satisfaction.

Customer Retention.

Customer retention is the policy a company adopts to retain its customers, some policies may include discounts,periodic sales, partnerships, distributors. For retailers, some customer retention data can be gained from credit card receipts. A major source of retention data for some retailers are loyalty programs.

Customer Performance drivers.

Performance drivers of customers include:

• Delivery performance

• lead time

• Response time

• Customer service.

Internal Business Process Measures

The internal business process is a link between the financial and customer measures,they are processes the company uses to achieve customer and shareholder value. Internal business process go beyond simple financial variance measures to include output measures such as quality,cycle time,yield,order fulfillment,production planning, throughput and turnover.

Learning and growth measures

Learning and growth measures comes after a company identifies its financial,customer and internal process strategic needs. The company would need to achieve new capabilities through learning and growth if it wishes to stay competitive and achieve its goals in the ever changing environment. Although the learning and growth measure is the last step designed by a balanced score card,it would be the first step performed because they are performance drivers for the desired strategic outcome.