Differentiation through Balanced Scorecard

The concept of Balanced Scorecard (BSC) was introduced in 1992 in an article by David Norton and Robert Kaplan in the Harvard Business Review, which made an impact on the academic and business community due to its ease of application and usefulness.

The BSC is based on the idea that what drives performance must be measured; that is, “What you measure is what you get.” Therefore, if only financial performance is measured, you’ll get good financial performance. However, if you broaden your perspective, you will be able to achieve other objectives as well.

Norton and Kaplan designed the BSC as a method of determining a mission and a strategy, using numeric indicators for the purpose of integrating all of an organization’s functions and levels in order to apply the strategy in the right way at the right time.

The BSC methodology makes it possible to eliminate the gap in the execution of the strategy, translating senior management’s plan for the purpose of communicating its objectives to every member of the organization, in order to channel the team’s initiatives and activities toward achieving them.

The origin of the BSC is in the vision and strategies of an organization. In line with these, financial objectives are defined based on the results of the strategies and mechanisms we obtain according to our customers’ level of satisfaction.

Before writing their article on the BSC, Norton and Kaplan analyzed the performance of different companies and reached the conclusion that there were four perspectives that would serve as the basis for achieving financial objectives that ensure the attainment of an organization’s vision. These perspectives are:

  1. Financial perspective.The purpose of this perspective is to respond to and satisfy shareholders expectations regarding the following financial parameters:
  • Return on capital
  • Growth
  • Use of capital
  • Benefit

The indicators used for this perspective are:

  • Asset turnover
  • Return on investment
  • Investment as a percentage of sales
  • Return on capital employed
  • Operating margin
  • Economic value added
  • Revenue
  • Debt to equity ratio
  1. Customer perspective.The purpose of this perspective is to respond to and satisfy customer needs; their income depends on the achievement of their objectives, generating a value that will be reflected in the financial perspective.

The indicators used for this perspective are:

  • Customer satisfaction
  • Complaints resolved
  • Service contracts
  • Market
  • Customer attraction and retention
  1. Internal process perspective.The purpose of this perspective is to measure both shareholders and customers satisfaction, ensuring the excellence of key processes in the organization. The indicators for evaluating this perspective are clear and precise, as they assess the nature of these internal processes of the organization, in order to ensure shareholders and customers satisfaction. These indicators are:
  • Production levels
  • Reprocessing costs
  • Efficiency in the use of assets
  • Waste or shrinkage
  • Unit cost by product
  • Unit cost by activity
  • Benefits of continuous improvement
  1. Organizational Learning Perspective.The purpose of this perspective is to ensure the creation and stability of value in the future. The objectives of this perspective serve as a platform for the organization’s potential performance, which enables it to adapt to new situations, change, improve and develop. They are based on:
  • Employee capabilities
  • Appropriate technology
  • Access to strategic information
  • Timely decision making
  • Adequate cultural climate for the achievement of objectives

The measurement indicators used for this perspective are:

  • Development of key competencies
  • Gap in key competencies
  • Retention of key employees
  • Organizational climate
  • Employee satisfaction
  • Strategic information systems
  • Use of and access to strategic information
  • Values and trust in leadership

Undoubtedly, the BSC is more than a tool box. It is a set of practices that some “specialists” consider to be mutually exclusive, although they complement each other closely in a notably logical relationship actually. In fact, achieving good financial results depends on good customer service, for which we must have effective and efficient internal processes, which in turn depend on adequate operation of our organizational learning infrastructure.

The BSC is based on what is known as value-based management and activity-based management, which enables us to strengthen activities that create value and discontinue those that eliminate or lessen their impact on the organization’s performance.

Most importantly, it is a tool that enables us to focus on our long-term strategy in order to change direction if necessary when we stray from it, which is of great help in achieving the objectives and goals we have set.

Autor: Dante Merino La Rosa

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