Great Business Ideas: The balanced scorecard

Great Small Business Ideas to Start: The balanced scorecard

In The Balanced Scorecard Robert Kaplan and David Norton highlight several ways entrepreneurs can increase the long-term value of their business. The balanced scorecard offers a measurement and management system that links strategic objectives to improved performance.

The idea

The balanced scorecard approach enables managers to generate objectives in four business areas, providing a framework for action, with progress being regularly assessed. Its success lies in its ability to unify and integrate a set of indicators that measure the performance of key activities and processes at the core of the organization’s operations. This presents a balanced picture, and highlights specific activities that need to be completed.

The balanced scorecard takes into account four essential areas— traditional “hard” financial measures are only one part. The three “soft,” quantifiable operational measures comprise:

  • Customer perspective—how an organization is perceived by customers.
  • Internal perspective—those issues in which the organization must excel.
  • Innovation and learning perspective—those areas where an organization must continue to improve and add value.

Two of the highest-profile and most successful examples of the balanced scorecard at work are provided by Mobil Oil (now Exxon Mobil) and CIGNA Insurance. Exxon moved from last to first in profitability within its industry from 1993 to 1995—a position it maintained for four years. CIGNA Insurance was losing $1 million a day in 1993, but within two years it was in the top quartile of profitability in its industry. Both organizations attribute a significant element of their success to the balanced scorecard.

In practice

The type, size, and structure of an organization will determine the detail of the implementation process.

However, the main stages involved are as follows:

  1. Preparing and defining the strategy. The first requirement is to clearly define and communicate the strategy, ensuring that people have an understanding of the strategic objectives or goals, and the three or four critical success factors that are fundamental to achieving each objective or goal.
  2. Deciding what to measure. Goals and measures should be determined for each of the four perspectives: financial, customers, internal processes, and innovation and learning perspective. Examples for each are shown opposite.
  3. Finalizing and implementing the plan. Further discussions are necessary to agree the detail of the goals and activities to be measured, and what precise measures should be used. This is the real value in the approach: deciding what action to take to achieve the goal.
  4. Communicating and implementing. Delegate balanced scorecards throughout the organization.
  5. Publicizing and using the results. While everyone should understand the overall objectives, deciding who should receive specific information, why and how often, is also important. Too much detail can lead to paralysis by analysis; too little, and the benefits are lost. Use the information to guide decisions, strengthening areas that need further action, and using the process dynamically.
  6. Reviewing and revising the system. This allows wrinkles to be smoothed out and new challenges to be set. The best way to tell whether the balanced scorecard is working for your business is to set higher measurement goals every year, and continue to meet them.

THE BALANCED SCORECARD

Perspective Typical goals Typical measures
Financial• Increased profitability
• Share price performance
• Increased return on assets
• Cash flows
• Cost reduction
• Gross margins
• Return on capital/equity/ investments/sales
• Revenue growth
• Payment terms
Customers• New customer acquisition
• Customer retention
• Customer satisfaction
• Cross-sales volumes
• Market share
• Customer service and satisfaction
• Number of complaints
• Customer profitability
• Delivery times
• Units sold
• Number of customers
Internal processes• Improved core competencies
• Improved critical technologies
• Streamlined processes
• Improved employee morale
• Efficiency improvements
• Improved lead times
• Reduced unit costs
• Reduced waste
• Improved sourcing/supplier delivery
• Greater employee morale and satisfaction, and reduced staff turnover
• Internal audit standards
• Sales per employee
Innovation and learning perspective• New product development
• Continuous improvement
• Employees’ training and skills
• Number of new products
• Sales of new products
• Number of employees receiving training
• Outputs from employees’ training
• Training hours per employee
• Number and scope of skills learned