Balanced Scorecard
One of the most crucial aspects of managing a business is making it grow and be sustainable over time. Many expert businessmen have created several ways of measuring a company’s success and performance. This article will go through the Balanced Scoreboard, one of the most innovative methods for tracking a business’s performance.
What Is a Balanced Scorecard?
A Balanced Scoreboard is a method created for companies that aim to improve their services’ quality and response time by eliminating the need to perform repetitive tasks from their standard operating procedures. It is also crucial to consider that when these companies eliminate these tasks, they also eliminate the need for people to perform them, ultimately demanding them to have smaller teams.
However, this is also why some companies are reluctant to incorporate this method into their procedures, as they don’t want to lay off their employees. These employees can sometimes be a fantastic source of ideas for improving a company’s current methods and laying them off can affect the productivity and morale of those who will remain.
Still, a company works much better when they work to capacity, as this allows it to reduce the financial expenses created by the improved quality measures.
Once business owners and executives comprehend how much their quality cycle-time affects their companies, they will start executing more aggressive strategies that lead them toward their optimal capacity. In order to do this, they must expand their companies’ sales and market their products to new customers, increasing their product’s market flow and ultimately generating more revenue.
It is a fantastic way of optimizing a business’s operations with as few operating expenses as possible. Still, it is only possible if the marketing and sales departments generate the needed volume. Otherwise, the company won’t meet its expectations, which will be reflected in its financial statements at the end of the semester.
In the best-case scenario, after implementing this balanced method of tracking the company’s performance, all team members should start noticing how each strategy component impacts the company’s system as a whole. This is done through specific KPIs that align with the company’s vision and aim to achieve its goals.
What Are Balanced Scorecard Perspectives?
The Balanced Scoreboard methodology is based on four main perspectives that allow business owners to understand all the crucial aspects of their strategies. These perspectives are the following:
- Customer perspective: This explains how the customers see the company.
- Internal perspective: This explains which aspects the company must excel at.
- Innovation and learning perspective: This explains how the company can grow to improve its clients’ value.
- Financial perspective: This explains how the company will look like to its shareholders.
The Balanced Scoreboard method will provide information from four perspectives that overlap and affect each other, which helps managers improve and optimize the strategies implemented within the company. In addition, it will help eliminate unnecessary measures that waste the company’s money. It is crucial for a company to only focus on its most critical efforts, as this will help it keep its resources safe.
Several companies have already implemented the Balanced Scorecard method to demonstrate its effectiveness as a fantastic management tool. It helps managers understand several points of view in only one management report, which makes the process of creating new strategies much faster and more efficient.
Another fantastic perk of the Balanced Scorecard method is preventing suboptimization. It allows managers to see how a change in one area may affect the others, preventing them from achieving their objectives poorly. Some key examples are companies that wish to reduce their time to market by either improving their internal product management or only releasing new and different products. This method will allow them to evaluate both scenarios and pick the one that gives them the best possible results in financial and resources management terms.
Moreover, this article will explain how several companies have adapted this methodology to their previous management methods to increase their performance as much as possible.
Financial Perspective
This is probably one of the most critical indicators for most business owners, as it is the direct result of the execution of the strategies. Most KPIs that are measured to obtain the financial perspective of the company include its profitability, shareholder value, and growth. Some companies have extremely basic financial goals, such as making enough money to remain open and continue working. Still, the survival of the company can be measured through several financial KPIs that will help managers check whether the company is being sustainable or not.
Nonetheless, after looking at today’s business environment, many business owners have started wondering whether they should keep determining success according to financial KPIs on their own. Many criticize how close-minded this method can be, as it doesn’t allow them to focus on other valuable actions that fall outside the financial scope.
That’s why it is crucial to perform periodical shareholder value analyses, as this helps managers predict future changes in the company’s cash flow and estimate a rough value of the current financial start of the company. Many business owners prefer shareholder value analyses over other activities, as they allow them to better understand how the current financial KPIs can affect the company in the long term.
Some of the reasons why only looking at financial indicators to determine whether a company is successful or not is because it prevents managers from improving certain aspects, such as customer satisfaction, employee motivation, and cycle time. Financial KPIs used to be the direct result of the company’s operations and procedures, which would make managers believe that if they do everything how it is supposed to be done, they will get high financial KPIs, which isn’t always the case.
Nowadays, most managers understand that the company works holistically, and if they want to achieve their desired financial KPIs, they must execute significant changes in other areas of the company. Still, this doesn’t mean that understanding the financial perspective is wrong, as this will also help understand how effective the company’s quality management is.
Sometimes looking at an example of this can be much easier to understand than simply reading some words, which is why the following business case may help readers understand this perspective.
Between 1987 and 1990, an electronics company decided to make an order-of-magnitude quality improvement regarding its on-time delivery and overall performance. This translated into its defect rate dropping from 500 to 50 parts per million and its on-time delivery rising from 70% to 96%. Still, these improvements didn’t represent a real benefit to the company, as the financial results had little to no improvement during that time period.
These improvements didn’t translate into an increase in profit because the company failed to understand how other aspects of its operations affected the financial outcome. Some factors, such as a lack of focus on the marketing of the products, prevented the company from capitalizing on the new operational achievements.
Nevertheless, it is difficult for managers to understand why they’re not getting better financial results if they don’t look at the company from several perspectives before implementing new strategies. This can sometimes be extremely frustrating, especially after investing valuable resources in the latest techniques. Still, the truth is that if the results of the strategies aren’t being financially reflected, they should reexamine them from a different point of view and understand what makes them non-profitable.
That’s why the Balanced Scorecard method introduces the other three perspectives, which allows businesses to measure new KPIs and determine which ones need to be improved for their overall success. Still, it is crucial to remember that implementing this method doesn’t guarantee financial success, as it is only a way of creating more specific strategies with measurable objectives. Therefore, if after using this method, the operational improvements still aren’t being reflected in financial KPIs, the company’s executives should keep tweaking their strategies and implementation plans.
Some of the reasons this problem may happen are that companies fail to follow up their operational improvement with further actions, as sometimes improving aspects such as cycle-time and product quality can translate into excess capacity. In those cases, the extra staff must be relocated or laid off to reduce expenses as much as possible.
However, this is only one example of several ways operating procedures can affect the company. The real lesson businessmen need to learn is to always consider the correlation between operations and financial KPIs.
Customer Perspective
It is common for companies to claim to be customer-oriented, as understanding the customer’s needs is a crucial aspect that needs to be considered when generating new strategies. Nonetheless, this customer-oriented perspective isn’t enough if companies don’t translate their mission and vision into specific, measurable strategies that aim to upgrade their clients’ experience.
The following are some of the most crucial aspects to keep in mind when dealing with the customer perspective:
- Time: This category measures the company’s time to fulfill its client’s needs. Still, it can be divided into new and existing products. The latter represents the time between taking an order and delivering a product. In contrast, for new products, it describes how long it takes the company to develop and start shipping new products.
- Quality: This represents the defect levels of the products the clients receive, on-time deliveries, and the accuracy of its forecasts.
- Performance and service: This represents how crucial the value proposition of the services offered by the company is to its customers.
- Cost: Finally, the last aspect is how clients perceive the product’s price.
In order for the Balanced Scorecard method to work, companies must create specific goals for each of these aspects and constantly measure them through KPIs. Some good examples of goals that tackle the customers’ perspective are releasing new products sooner, improving the time to market, creating new partnerships, and optimizing their products to tackle their client’s needs.
After creating these general goals, the company’s managers can start creating specific goals and measures, which is the most critical part of the Balanced Scoreboard method, as it explains which steps need to be followed to meet the customers’ expectations.
Still, the article has only discussed external perspectives that need to be backed up by internal and operational perspectives, which will be explained in the following aspects of the method.
Internal/Operational Perspective
Although external perspectives are crucial for creating strategies that work as effectively as possible, these points of view must translate into changes in the company’s internal functioning. It is virtually impossible to meet clients’ expectations without fundamental changes in how things are done within a company’s operations. That’s why this part of the Balanced Scorecard method is crucial for improving the company as a whole.
Managers must consider the business processes that have the most significant impact on customer satisfaction, such as those that affect their company’s productivity, cycle time, quality, and employee skills. In addition, they must also identify their main competencies to ensure their company remains a market leader by constantly improving their technologies and strategies. This will translate into a set of processes and competencies the company should focus on to become the best in its market sector.
The managers might find that the most crucial aspects they should focus on are technology capability and manufacturing excellence, which will provide the expected impact in the previously described external KPIs. Therefore, they must develop operational procedures to improve these aspects.
In order to improve these operational aspects, managers must also examine how their employees are performing, as most of these operational KPIs are affected by the actions performed at workstation levels. Therefore, it is crucial to train the company’s staff to work much more efficiently and make them understand the overall objectives. This will ensure that everyone in the company, no matter their role, understands how they affect the final results and whether they can improve their current activities or not.
A fantastic way of doing this is incorporating information systems to help managers find the source of each problem in the Balanced Scorecard. Executives will find out whether they have a good information system if they can quickly identify the origin of the problem to get it fixed as soon as possible.
On the other hand, if the information system isn’t correctly optimized, it can be a massive setback to the company’s operations, as the information won’t be available when needed. In these cases, the company must focus on creating a more responsive information system that delivers timely reports to all levels of the company.
Innovation/Learning Perspective
Although the previously described perspectives allow business owners to identify the most critical measures that need to be implemented to improve the company’s success, it is crucial to remember that all industries will keep advancing. Therefore, businesses can’t just sit there and ignore all the technological upgrades happening in the world.
In order for a company to remain successful, it must be able to innovate and improve its value proposition. Some ways of doing this are creating new products, introducing new operating procedures, and creating more value for its clients, as this will help the company to dive into new markets and increase its value.
Some great innovation measures focus on developing new products as fast as possible to meet the customers’ needs exactly when they appear. However, it is crucial to examine the things needed by the current customer base to ensure that the new products succeed. On the other hand, a company can focus on improving the quality of existing products and shaping them to current market trends and designs.
Improving and creating products isn’t the only way a company can incorporate innovative measures into its strategies, as it can also test new ways of achieving its goals through its current processes. This can be done by constantly monitoring the process performance of each department and setting up a rate of expected improvement that must be reached in a determined time frame.
An excellent example of this is Miliken & Co., a company that recently won the Baldrige Award. Sometimes, this could make employees feel too comfortable in their jobs, translating into a lack of innovation and improvement. Therefore, its CEO decided to implement a “ten-four” improvement program in all the departments of its company, which consists of measuring all the defects and mistakes commonly done and reducing them by a factor of ten over the following four years. This allows the company to constantly improve itself and provide its customers with the best possible service.
Bottom Line
The Balanced Scoreboard method is a strategy performance management tool that allows businesses to improve their current practices and strategies to become as successful as possible and ensure constant growth of their operations.
Therefore, the previous guide was meant for business owners or management enthusiasts to better understand this strategic planning and management system so that they can use it in their companies. Still, this website is filled with similar information about other performance management methods worth reviewing before settling on one. Managers must constantly learn new ways of optimizing their procedures – reading about these methods is the first step.