Balanced Scorecard As An Effective Measure Of Strategy Success

The era of traditional financial accounting measures such as return-on-investment (ROI) and earnings-per-share (EPS) has passed, as these metrics were unable to reflect a firm’s skills and competencies, the continuous improvement and innovation businesses try to match with today’s competitive environment demands.

To address the shortcomings of current performance measurement systems, some managers have concentrated on enhancing the relevance of financial measures, while others alternatively focus attention on operational measures like cycle time or defect rates. Realising that no single measure could provide a clear performance target and track critical areas of the business, managers prompted a more holistic view of business health to ensure they are working towards achieving strategic goals.

What is a Balanced Scorecard?

Kaplan and Norton (1992) summarised a ‘balanced scorecard’ as a set of measures that provides top managers with a quick yet comprehensive overview of the business. It incorporates financial measures that reflect the outcomes of past actions and complements these financial metrics with operational measures related to customer satisfaction, internal processes, and the organisation’s innovation and improvement activities.

In particular, the balanced scorecard enables managers to view the business from four key perspectives.

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Financial Perspective

Financial measures such as profitability, sales growth, increased market shares or return on equity (ROE) are commonly used by senior management to assess a business’s financial performance. In the balanced scorecard, these essential metrics reflect how the company’s strategy, implementation and execution are contributing to the bottom line.

An improved operational system, including cycle time, enhanced customer satisfaction and employee motivations, can lead to the firm’s financial success, but this is not necessarily accurate at all times. In such a case, executives need to rethink the corporation’s strategy and its action plans.

Key financial measures and metrics can be as follows:

• Goals: improved profitability, cost efficiency, increased shareholder value etc.

• Measures: Profit margin, net income, earnings per share, return on investment etc.

Customer Perspective

Customer centricity has become the corporate mission of most companies today, either through customer surveys or benchmarking procedures, businesses aim to provide the best practices for their target audiences.

When purchasing any product or using any service, customers tend to prioritise the four key things: Time, Quality, Performance or Service and Cost. To put the balanced scorecard to work, companies should define goals for the four areas of customer focus, translate those general goals into four specific goals and identify a corresponding measure for each.

Key customer satisfaction measures and metrics can be as follows:

• Goals: improved customer retention and customer loyalty, product and service quality etc.

• Measures: net promoter score, customer churn rate, on-time delivery rate, defect rate etc.

Internal Business Perspective

At its heart, satisfying customer needs is crucial in retaining existing customers and securing new ones. Ultimately, excellent customer performance derives from business processes, decisions and actions occurring internally in an organisation.

To achieve that goal, companies should attempt to identify their core advantages, competencies and critical technologies needed to remain market leaders and specify measures for each.

Key internal business measures and metrics can be as follows:

• Goals: streamlined supply chain management, enhanced employee productivity etc.

• Measures: cycle time, supply chain cost, employee utilisation rate etc.

Innovation and Learning Perspective

If customer-based and internal business process measures help companies keep an eye on the most critical factors for competitive success, this fourth part of the balanced scorecard requires that businesses make continual learning and improvements in operating efficiency, innovate to launch new products with expanded capabilities to create more value for customers, generate more revenues and improve margin with new market penetration.

Key innovation and learning measures and metrics can be as follows:

• Goals: leadership, new product development, enhanced product quality etc.

• Measures: product variations, product reliability ratings, lead time etc.

Example of a balanced scorecard

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Why is a Balanced Scorecard an Essential Tool to Measure Strategy Success?

First and foremost, many companies adopt the use of a balanced scorecard because it meets several managerial needs. A well-structured scorecard consolidates many of the seemingly disparate elements of a company’s competitive agenda into a single management report: enhancing customer orientation, reducing response times, improving quality, fostering teamwork, accelerating new product launches, and focusing on long-term management. This enables managers to conserve time and resources when reviewing to improve procedures and operations.

Secondly, scorecards offer management numerous valuable insights into the firm’s service quality, performance and organisational capacity in addition to its financial track record. In addition, by forcing senior managers to evaluate critical measures simultaneously, this comprehensive perspective enables them to identify how decisions and improvements in one domain may impact others. For instance, if a team speeds up product development, they need to assess whether this leads to launching lower-quality products that could harm customer satisfaction.

When a Balanced Scorecard is Not Balanced

The balanced scorecard does nothing more than translate a company’s strategy into specific measurable objectives. However, even an excellent set of balanced scorecards does not guarantee a winning strategy. It is when the linkage between operational measures and financial measures is broken. In short, an improvement in operational performance fails to be reflected in the financial results.  

As an example, improved processes and enhanced quality often lead to excess capacity – more production capability than is necessary to meet current demand. If companies don’t take proactive steps to address this excess capacity effectively, disappointing financial measures will occur. Firms can either boost revenue by finding new customers, expanding into new markets or increasing sales to existing customers can help absorb the excess output. Otherwise, if demand does not justify the excess capacity, companies must consider reducing costs to avoid financial strain. They might entail scaling back operations, laying off staff, or temporarily shutting down underperforming production lines to align capacity with demand.

Moreover, when the balanced scorecard is treated merely as a measurement framework, a shift to KPIs rather than objectives, it risks becoming a set of metrics imposed from the top down. This approach can create confusion among employees who may not fully understand how their work aligns with the broader organisational strategy. They might view the scorecard as a bureaucratic tool rather than a strategic framework, leading to disengagement.