THE BALANCED SCORECARD

The performance measures considered up to this point have relied only on financial accounting
measures as the means to evaluate performance. Over time, the trend has become to incorporate
both quantitative and qualitative measures and short- and long-term goals when evaluating the
performance of managers as well as the company as a whole. One approach to evaluating both
financial and nonfinancial measures is to use a balanced scorecard.

Suppose you work in retail and your compensation consists of an hourly wage plus a bonus based
on your sales. You have excellent interpersonal skills, and customers appreciate your help and
often seek you out when they come to the store. Some of your customers will return on a different
day, even making an extra trip to the store to make sure you are the employee who helps them.
Sometimes these customers buy items and other times they do not, but they always come back.
Your compensation does not include any acknowledgment of your attention to customers and
your ability to keep them returning to the store, but consider how much more you could earn if
this were the case. However, in order for compensation to include nonfinancial, or qualitative,
factors, the store would need to track nonfinancial information, in addition to the financial, or
quantitative, information already tracked in the accounting system. One way to track both
qualitative and quantitative measures is to use a balanced scorecard.

WHAT IS A BALANCED SCORECARD?

• A balanced scorecard is a strategic planning framework that companies use to assign
priority to their products, projects, and services; communicate about their targets or goals;
and plan their routine activities. The scorecard enables companies to monitor and measure
the success of their strategies to determine how well they have performed.
• It is a set of measures that gives top managers a fast but comprehensive view of the
business.
• It includes financial measures that tell the results of actions already taken. And it
complements the financial measures with operational measures on customer satisfaction,
internal processes, and the organization’s innovation and improvement activities—
operational measures that are the drivers of future financial performance.

Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex
task of navigating and flying an airplane, pilots need detailed information about many aspects of
the flight. They need information on fuel, air speed, altitude, bearing, destination, and other
indicators that summarize the current and predicted environment. Reliance on one instrument
can be fatal. Similarly, the complexity of managing an organization today requires that managers
be able to view performance in several areas simultaneously.

History

• first suggested by Art Schneiderman of Analog Devices in 1987 as a means to improve

corporate performance by using metrics to measure improvements in areas in which
Analog Devices was struggling, such as in a high number of defects.
• Schneiderman went through different iterations of a balanced scorecard design over
several years but the final design chosen measured three different categories: financial,
customer, and internal.
 THE BALANCED SCORECARD

• The financial category included measures such as return on assets and revenue growth,
the customer category included measures such as customer satisfaction and on-time
delivery, and the internal category included measures such as reduced defects and
improved throughput time.
• Eventually, Robert Kaplan and David Norton, both Harvard University faculty, expanded
upon Schneiderman’s ideas to create the current concept of the balanced scorecard and
four general categories for evaluation: financial perspective, customer perspective,
internal perspective, and learning and growth.

The Balanced Scorecard Links Performance Measures

• How do customers see us? (customer perspective)
• What must we excel at? (internal perspective)
• Can we continue to improve and create value? (innovation and learning perspective)
• How do we look to shareholders? (financial perspective)

Balanced scorecard can act as a powerful

A. Development framework
B. Operations framework
C. Service framework
D. Organizing framework

The balanced scorecard forces managers to focus on the handful of measures that are most
critical. Several companies have already adopted the balanced scorecard. Their early experiences
using the scorecard have demonstrated that it meets several managerial needs.
First, the scorecard brings together, in a single management report, many of the seemingly
disparate elements of a company’s competitive agenda: becoming customer oriented, shortening
response time, improving quality, emphasizing teamwork, reducing new product launch times,
and managing for the long term.
Second, the scorecard guards against suboptimization. By forcing senior managers to consider
all the important operational measures together, the balanced scorecard lets them see whether
improvement in one area may have been achieved at the expense of another.

Financial Perspective
• The financial performance section of a balanced scorecard retains the types of metrics
that have historically been set by companies to evaluate performance.
• Include metric such as ROI, RI, and EVA.
• There are other financial measures that can be used as well, for example, earnings per
share (EPS), revenue growth, sales growth, inventory turnover, and many others.
Internal Business Perspective
• This requires that the company monitor its internal operations and evaluate them to
ensure they are meeting the strategic goals of the corporation.
• There are many variables that could be used as internal business measures, including
number of defects produced, machine downtime, transaction efficiency, and number of
 THE BALANCED SCORECARD

products completed per day per employee, or more refined measures, such as percent
of time planes are on the ground, or ensuring air tanks are well stocked for a scuba
diving business.
Customer Perspectives
• Examples of common variables that could be measured include customer satisfaction,
number of repeat customers, number of new customers, number of new customers from
customer referrals, and market share.
Learning and Growth
• are a means to assess how the employees and management are working together to
grow the company and to help the employees grow within the company.
• Examples of measures in this category include the number of employee suggestions that
are adopted, turnover rates, hours of employee training, scope of process
improvements, and number of new products.

Example: Corporate Balanced Scorecard

 THE BALANCED SCORECARD

Example: Divisional Balanced Scorecard

 THE BALANCED SCORECARD

Strength of the Balance Scorecard

• Communicates strategy
• Real and complete view of the business performance
• Relevant not just for financial stakeholders
• Encourages long term strategies
• Highly Flexible – KPIs chosen by the business

Weakness of the Balance Scorecard

• Needs to be updated thoroughly on a regular basis to stay relevant
• Very difficult to balance all perspectives
• Lots of resources needed to measure a vast amount of data for KPIs

Key Concepts and Summary

• Balanced scorecards use both financial and nonfinancial measures to evaluate
employees.
• The four categories of a balanced scorecard are financial perspective, internal business
perspective, customer perspective, and learning and growth perspective.
• Financial perspective measures are usually traditional measures, based on financial
statement information such as EPS or ROI.
• Internal business perspective measures are those that evaluate management’s
operational goals, such as quality control or on-time production.
• Customer perspective measures are those that evaluate how the customer perceives the
business and how the business interacts with customers.
• Learning and growth perspective measures are those that evaluate how effectively the
company is growing by innovating and creating value. This is often done through
employee training.
• Well-designed balanced scorecards can be very effective at goal congruence through the
utilization of both financial and nonfinancial measures.
 THE BALANCED SCORECARD

Activity 3.1 : The following are elements in the balanced scorecard and the four key
perspectives. Match the elements with the correct perspectives.

1. Improve organizational trust and teamwork A. Financial perspective

2. Strengthen government engagement B. Learning and growth
3. Deliver quality services to special populations perspective
4. Achieve financial stability C. Internal perspective
5. Increase public awareness and visibility D. Customer perspective
6. Contribute to human services research and innovation
7. Improve efficiency and effectiveness of contracting
process
8. Build professional competencies that support strategy
9. Develop and implement an integrated information
system
10. Deliver services consistent in value and quality

Activity 3.2 : Classify each of the following performance measures into the balanced scorecard
perspective to which it relates: financial perspective, internal operations perspective, learning
and growth perspective, or customer perspective.
A. Number of improved products
B. Time from packaging to delivery or display
C. Production costs
D. Number of customer suggestions
E. Sales mix revenues
F. Number of repeat customers

Activity 3.3 : Classify each of the following performance measures into the balanced scorecard
perspective to which it relates: financial perspective, internal operations perspective, learning
and growth perspective, or customer perspective.
A. Employee satisfaction surveys
B. Units of waste per production process, uniformity of products and inventory control
C. Number of energy-efficient bulbs replaced
 THE BALANCED SCORECARD

D. Management training course certificates awarded

E. Divisional profit
F. Number of customer referrals

Activity 3.4 : Coral Creations has strategic plans that call for rapid growth, a limited number of
units for each design to enhance exclusivity, designs for the perfect fit, on-time delivery to
customers, retention of highly trained employees with innovative skills, and excellent inventory
control.
A. Suggest one performance measure for each dimension of the balanced scorecard for
Coral Creations.
B. Take one of your measures and discuss the linkage it has to multiple strategies in Coral’s
plan.

References:
1. https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2
2. https://opentextbc.ca/principlesofaccountingv2openstax/chapter/describe-the-balanced-
scorecard-and-explain-how-it-is-used
3. https://corporatefinanceinstitute.com
4. https://www.digitalarchives.wa.gov/governorlocke/improve/quality/tools/BSC%20Washi
ngton.pdf