The balanced scorecard tool is used to manage performance in business models, organizational structures, or business processes.
The balanced scorecard is a vital planning and management tool used to evaluate organizational performance which exceeds conventional financial measures.
It is result oriented and provides a balanced view of an enterprise by applying the strategic plan as an active framework of objectives and performance measures.
The foundational hypothesis of the balanced scorecard is that the drivers of value creation need to be understood, measured, and enhanced in order to create sustainable performance.
The balanced scorecard is composed of four dimensions, which are:
- Learning and Growth.
- Business Process.
- Customer.
- Financial.
The balanced scorecard includes distinct objectives, particular measures, and directed outcomes obtained from an organization’s concept and strategy.
There are five components of the balanced scorecard which are:
1. Learning and Growth Dimension: The learning and growth dimension covers metrics regarding employee training and learning, product and service innovation, and corporate culture.
Theses metrics govern the use of training funds, mentoring, knowledge sharing, and technology improvements.
2. Business Process Dimension: The business process dimension covers metrics that could show how well the enterprise is operating and if their products can fulfill their customer needs.
3. Customer Dimension: The customer dimension covers metrics on customer focus, satisfaction and delivery of value.
These metrics captures how well customer needs are being fulfilled, how content they are with products and services, if the delivery of those products and services meet with their quality expectations, and their overall experience with the enterprise.
4. Financial Dimension: The financial dimension recognizes what is financially essential to accomplish the strategy. Examples of financial measures indicate profitability, revenue growth, and added economic value.
5. Measures or Indicators: There are two fundamental types of measures or indicators which are:
i. lagging indicators that provide the results of actions that have already being captured.
ii. leading indicators that provide information about future performance.
Objectives are inclined to have lagging indicators, but using related leading indicators could provide more real-time performance information.
There are some things to consider when using the balanced scorecard which are:
- For the measures to be significant they should be quantitative, connected to the strategy, and easily understood by all stakeholders.
- When describing measures, business analysts think about other relevant measures that are in place and make sure that any new or changed measures do not negatively affect any existing ones.
- The metrics of the balanced scorecard may be active, changing, and evolving at any given point in time, so each dimension is affected by the others.
- The balanced scorecard allows the organization to set up monitoring and measurements of its progress against objectives which would be used to adjust strategy as needed.
- Because scorecards are used to analyze the performance of the enterprise or a business unit within the enterprise, alterations to the measures can have extensive implications and must be clearly communicated and carefully managed.
The balanced scorecard has both its strengths and weaknesses which include:
Strengths
• It supports comprehensive and balanced planning and thinking.
• The short, medium, and long-term goals could be matched into programs with accumulative success measures.
• The strategic, tactical, and operational teams could be more easily aligned in their work.
• It boosts progressive thinking and rivalry.
Limitations
• There could be an absence of a clear strategy which would make adjusting the dimensions difficult.
• It could be seen as the exclusive tool for strategic planning rather than just one tool to in a range of strategic planning tools.
•It could be misconstrued as a substitute for strategic planning, execution, and measurement.