How does the balanced scorecard work?

If you’re a business owner or are working in the business department of a company, then you know for sure that measuring the performance of an organization is essential to its viability and growth. Over the years, a lot of different methods and frameworks have been developed for that matter. The balanced scorecard is one of the most popular performance measurement tools out there; and, for a good reason. In this article, we’ll analyze how the balanced scorecard works; along with some potential benefits it might yield for a business. 

Basic concept and the four perspectives of the Balanced Scorecard

With the passage of time, managers realized that there isn’t a single metric that can guide a business to a clear performance target. By that token, the balanced scorecard was created to give business executives a more comprehensive picture of what’s going on in the business. More specifically, it depicts not only financial, but also operational measures, in a balanced way. This is done by showing the manager — or any other stakeholder of the company — how its operations are seen through four different perspectives. These perspectives are: 

  1. customer perspective
  2. internal perspective
  3. innovational and learning perspective, and 
  4. financial perspective 

It’s important to note here that each of the perspectives comes with its own sets of goals and measures. With that said, let’s have a closer look at each one, separately:

1. Customer perspective 

Customers’ perspective of the company is of very high importance. It should be a prime concern for the managers; and it’s usually closely connected to the company’s mission. Research has shown that customers mostly take intereste in the following aspects: 

  • time
  • quality
  • performance and 
  • service

Given that fact, the goals and measures for the specific perspective need to be related to those aspects; depending on the business model, of course. Another sensitive element that you need to consider is the price; which is highly regarded by some customers. 

2. Internal perspective 

The internal business processes of a company should be largely based on the customer perspective, mentioned above. In other words, the internal perspective regards what you need to do, in order to fulfil the customers’ needs and expectations. As for the measures pertinent to the specific perspective, they should derive from the internal business processes that affect customer satisfaction. The organization should continuously identify, evaluate and ensure the elements that fulfil customer needs; and, of course, make them stand out from the competition.

3. Innovational and learning perspective 

As the global market becomes increasingly competitive, the targets to achieve competitive advantage should be constantly revised; and adapted to that environment. In essence, a company can retain its competitive advantage, by making improvements to their products and introducing new features. If they continue to improve, innovate and learn over time, they will increase their capabilities and, consequently, their value.   

4. Financial perspective 

The final perspective described has mainly to do with the shareholders’ perception of the company. To elaborate, the goals of that perspective should be related to how business operations contribute to improving the income, growth and value for its shareholders. However, it’s extremely important here to state that good financial results don’t always go hand in hand with customer satisfaction. On the contrary, financial success can be a result of excellent business operations. 

Is the balanced scorecard worth it after all?

Having described the four perspectives one by one in the section above, here’s how a balanced scorecard template should look like in real life:

Diagram: How does the balanced scorecard work?

As you can see in the picture, all the perspectives are closely related and greatly affect each other. If you want to learn how to measure and improve your business operations but don’t have a framework, I would strongly recommend using the balanced scorecard to get a smooth start. Besides measuring business operations, it can really help communicate your goals to colleagues and managers; and prioritize work and projects, according to your strategy. 
If you’d like to learn about the balanced scorecard in more detail, perhaps beyond what we have to say, you can find some useful information here and here.

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