The balanced score card is a strategic planning management tool that was created in 1987 by an independent management consultant by the name Art Schneiderman while he was working at a company called Analog devices. The balanced score card was later studied by Drs. Robert Kaplan and David Norton who published a book by the name Balanced score card and are widely recognized as having been the ones who brought the tool into mainstream strategic management. The balanced score card deviates from the traditional financial reporting system that focuses on historical measures business performance where the emphasis was on how a business has performed in the past with no indication of how the business is likely to perform in the future.
The system not only focuses on the financial performance and measurement of historical performance but takes into account other aspects of the business which affect to a large extent how it will perform financially. The balanced score card takes into account; financial measures, customer, business process and learning measures. The customer perspective takes into account the relationship between the customers and the business. If customers are happy with the company, it is assured of doing well in the future. However, if the customers are unhappy with the goods or services provided, they will move onto other suppliers who are able to meet their needs satisfactorily. The measures that are monitored include customer retention, customer retention rates, market share in the different market segment that the company operates in etc.
The financial perspective of the balanced score card focuses on the traditional need for financial information and data which is essential to the smooth operation of any business.
Businesses usually have more or less a good grasp of their financial situation and at times have more financial data and information than they can use effectively. The balanced score card focuses the businesses attention on the major parameters that are crucial for the success of the business. Under the financial perspective of the balanced score card, measures include economic value added, return on capital employed, operating income among others.
The business process perspective of the balanced score card focuses on the internal business processes that relate to the specific business. This helps the leadership of the business to accurately tell how well the business is running and whether they are meeting the needs of the consumers with the services and goods that they are offering i.e. whether they are living up to the company’s mission. It is important to note that the measures under the business process perspective of the balanced score card have to be designed and developed by people who are very intimate with the company’s operations and as such outside consultants cannot adequately cover them. Some of the measures include factory throughput, costs and cost management, quality of products etc.
The final perspective of the balanced score card is the learning and growth perspective. This focuses on the training for the company’s employees, the culture of the business at both an individual and corporate level. Since we live in a knowledge economy, the employees are the main resource available to the business and efforts should be made to ensure that the staff are trained and kept up to date especially as technology changes every so often and employees need to keep up to ensure that the business remains competitive and relevant. Measures in this perspective include employee retention, employee satisfaction etc.
The four perspectives of the balanced score card are not independent of each other but rather are used in harmony and together to achieve the mission, goals and aspirations of the business. They are all logically connected and show progression towards the business goals. Learning and growth within the organization will lead to better adaptation by the employees which leads to better business processes. With improvement in the business processes, there is more value addition for the consumer as they are able to get better, faster, more appropriate services and goods from the company. This in turn leads to better financial performance for the company.
Each perspective of the balanced score card includes measures, objectives, targets and initiatives. Objectives under the balanced score card are defined as the major goals that are to be achieved e.g. increasing employee satisfaction. Targets are specific measurable outcomes that the business wants to achieve e.g. 2% increase in customer retention numbers. Initiatives are the specific things that will be done to achieve the objectives. Measures are the various parameters the business will use to gauge how well they are doing as they work towards their objectives.
The balanced score card can be used as a Strategic Management System although it was initially meant to be a performance improvement system. It can be used to clarify the strategy of the business, strategic feedback and learning, communicate strategic objectives, and for planning, target setting and alignment of strategic alliances.
The Kenya Red Cross, which is a non for profit organization that operates in Kenya, Africa is one of the examples of businesses/ organizations that have adopted the Balanced score card as a technique to evaluate their performance and also as a Strategic management tool.
Working together with the consultancy firm verve/ Balanced Score card East Africa, the Kenya Red Cross Society was able to come up with a strategic plan that was at the right altitude. Not too high that it is too vague and not too low that it becomes specific. They were able to refine their mission by asking what it is that the organization offers to its beneficiaries and stakeholders. It was clear that the organization always strived to be the first in and last out in the areas where it operated and especially in areas where disasters had occurred or where relief food was being given out in times of famine/ drought. By using the Balanced score card, they were able to sum up their vision as simply ‘being there’.
By using the balanced score card, the Kenya Red Cross Society was able to come to the realization that strategic objectives in relation to their organization was simply the continuous improvement that they needed to put in place to ensure that they are constantly and always making their operations better, faster and leaner to be able to offer more timely and adequate help to their stakeholders. By using the four perspectives to guide their strategic planning process, they were able to have more clarity in terms of the organization’s strategic thinking and intent. They were able to directly and logically link the organization’s business processes, the financial perspective which included both donors to the organization and disbursements to the community who are the final stakeholders/ beneficiaries. For the first time the Kenya Red Cross was able to present their strategy graphically and also visualize it through the use of the strategy map. For the first time the society had a strategy that had performance measures and targets
Balanced Score Card Organization. “What is the balanced scored card?” Balanced Score Card Organization. Web.
Balanced Score Card Organization. “The Kenya Red Cross Success Story.” Balanced Score Card Organization. Web.